National Savings Certificate (NSC)

Why NSC Matters

NSCs help you reduce your taxable income if you are on the old tax regime. You can claim deductions of up to ₹1.5 lakh per year under Section 80C. Even the interest earned during the first four years is reinvested and qualifies for deduction, with only the fifth year’s interest being taxable.

They also provide reliable, guaranteed returns. For instance, investing ₹1.5 lakh grows to ₹2.17 lakh in five years, earning you ₹67,730 in total interest.

Unlike bank FDs, where senior citizens often get higher rates, NSC offers the same 7.7% to everyone, which can make it more attractive for retirees.

Additionally, NSCs can serve as loan collateral, allowing you to borrow against them at 85–90% of their value.

Challenges of NSC

The key drawback of NSC is that the interest earned in the fifth year becomes taxable. For example, on ₹2.02 lakh, the fifth year's interest of ₹15,565 would attract tax according to your slab. If you're in the 30% tax bracket, this means about ₹4,670 lost to tax.

There’s also inflation risk. After taxes, your effective return drops to around 5.4%, which may not keep pace with 2025’s inflation rate of 6.5%, meaning your money's purchasing power could slowly decline.

NSCs are locked in for five years. You cannot withdraw early unless in cases like the account holder’s death or a court order, making them less flexible than other investments.

How to Manage NSC Effectively

Consider laddering your investments. Instead of putting ₹5 lakh into one NSC, break it into five ₹1 lakh certificates, each maturing in different years after Year 5. This gives you better liquidity and helps spread out tax liabilities.

Pair NSCs with a Public Provident Fund (PPF). You might invest ₹1.5 lakh into NSC for higher fixed returns and another ₹1.5 lakh into PPF, which offers 7.1% tax-free returns. Together, they balance security and tax efficiency.

Stick with the old tax regime if you want to claim Section 80C deductions. For someone in the 31.2% tax bracket, this can save ₹46,800 per year.

When your NSC matures, think ahead. You can reinvest the ₹2.17 lakh into debt funds that might yield 8%, giving you around ₹17,360 per year after tax as ongoing income.

Final Thoughts

NSC is a solid, low-risk option for those wanting guaranteed returns and tax benefits, but it works best if you plan carefully. Watch out for taxation on the final year’s interest, stay mindful of inflation, and combine it with other tax-saving options to make the most of your investment. If you're using the old tax regime, NSC remains one of the most reliable ways to build a safe, disciplined savings plan.