Any sovereign backed investment (which means it is issued by the national government of a country) stands for the highest safety. Since the funds in NSC are backed by the central government, the investment does not get any safer than this because the government will not default in its payment.
In the case of NSC, the rate of return is locked at the time of investment and during the tenure of the investment (which is 5 years) it remains insulated from any changes in rates. That is because once you buy a NSC, you cannot continue to add to that particular investment certificate. If you want to increase your exposure, you will have to buy another. It is not an ongoing account like PPF which has to be serviced annually.
- Return is handed over on maturity
The return is compounded and handed over on maturity. The return all along has been compounded annually in the case of NSC. From April 1, 2016, bi-annual compounding of interest for NSC will no longer exist, and it will be done on an annual basis.
- Return is periodically reset
The returns of NSC are set at the start of the financial year. However, going forward, they will be recalibrated on a quarterly basis. The current rate for NSC 8.5% per annum.
Investments made in NSC qualify for a deduction under Section 80C.
Interest earned on NSC is taxable. However, as it is a cumulative scheme (e.g. interest is not paid to the investor but instead accumulates in the account), each year’s interest is considered reinvested in the NSC. Since it is deemed reinvested, it qualifies for a fresh deduction under Section 80C.
Only the final year’s interest, when the NSC matures, does not receive a tax deduction as it does not get reinvested, but is paid back to the investor along with the interest of the earlier years and the capital amount.
Should you invest in PPF or NSC?