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New NSC with 10 year maturity & 8.7% interest rate (earnings)

Revising many small saving schemes, the Government has earlier announced its intention to reduce the maturity term of National Savings Certificate from the current 6 years to 5 years (from 1 December 2011). While this is disappointing, the interest rate on these certificates is increased from 8% to 8.4%. Good news? Here’s one more..

Starting from 1 December 2011, another NSC (IX issue) will be started with a 10 year maturity period and 8.7% interest compounded annually. If you didn’t know about NSC’s, here are some salient features:

  • Minimum investment amount is Rs.100, and there is no maximum amount limit.
  • NSC’s are available in Rs.100, 500, 1000, 5000 and 10000 denominations and can also be taken in demat form in any post office that offers them. NSC’s can also be transferred from one post office to another post office.
  • Tax will not be deducted at source and you can also claim Tax benefits up to Rs.1 lakh under section 80c. However, the interest accrued is taxable (this is the only major difference between NSC and PPF apart from maximum investment limit). But, just like PPF, all the money you earn through NSC’s is free from wealth tax.
  • The current interest rate offered for 10 year scheme is 8.7% per year (8.4% for 5 year issue) but the Government will announce this rate every year before the financial year begins.
  • You can also pledge these certificates as a security
  • By simple calculations, if you invest Rs.100000 in NSC (10 year period) from 1 December 2011, you’d get Rs.234350 after 10 years, before taxing.

Update: For 2013-14, the interest rates are 8.50% for the 5 year issue and 8.80% for the 10 year issue.

Review: National Savings Certificates are secured investment assets that one can be assured of promised returns. Personally, my favourite non-equity investment avenue is PPF. But, it limits us to just Rs.1 lakh a year (and this may be increased or decreased in the future). So if someone really has some neat cash in hand which they do no need for some years, NSC can be a good idea. As said before, unlike PPF, interest here taxable. History says that the interest rate has mostly been between 8 and 9%. Considering inflation hovering between 6 and 10%, a 10 year NSC just gives you enough money to buy something (after 10 years) that you can buy today without investing the amount.

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