Tax-saving scheme for investors who are averse to equities

Now is the time to work out the best tax-saving schemes. Equity Linked Saving Schemes (ELSS) and ULIPs (Unit Linked insurance Plans) have had been the flavour for past couple of years and all traditional saving instruments were relegated.

But the things sound different this year. The retail investors are still cautious about investment in equities as revealed by MF industrys AUM (assets under management) composition in the past few months.

Obviously, investors are looking for alternative tax-savings instruments, which are safer and steadier than high volatile equities. For them, ET Intelligence Group is revisiting all these forgotten saving avenues.

Most of such assured returns on tax-saving products are offered by schemes floated by the Indian Postal department. One such product is National Saving Certificate (NSC).

This scheme is specially designed for IT (Income Tax) assessees. The amount invested under NSC (maximum up to Rs 1 lakh per annum) is exempted from tax liability. Such invested amount fetches a fixed rate of interest at 8% compounded half yearly. Thus, the scheme combines growth in money with reduction in tax liability.

Buying NSC is very easy. Any individual can purchase NSC in the denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 from any post office in the country. Payments can be made in cash, cheque or demand draft (DD) drawn in favour of the post master.

However, the issue of certificate will be subject to the realisation of the cheque, pay order, DD. To make things easy, one may facilitate the whole process through an authorized agent free of cost.

NSC is a long-term investment option offering assured returns. NSC is issued for a maturity period of six years.

Also, the rate of return is fixed at 8% per annum compounded half yearly. This 8% is not sensitive to interest rate cycle.

It means the rate offered on NSC does not fluctuate like deposit rates offered by banks on fixed deposits.

Unlike the bank FDs, there is no option for periodical interest payment. Rather the interest paid annually gets reinvested every year and the accrued interest is paid along with the principle at the time of maturity.

If someone buys NSC worth Rs 50,000 today, he/she is entitled to get around Rs 80,000 at the end of 6th year. Instead if someone parks the equivalent amount in bank deposits for six years at present, the maturity proceeds will be around Rs 77,000 (interest + principle). It is because the deposit rate offered by banks is lower around 7-7 .5% (It differs from bank to bank).

Obviously investment in NSC at this juncture looks attractive than bank deposits.

The added advantage is that NSC can also be transferred from one post office to another. The important thing to note that there is no upper limit on investment in NSC.

However, investment up to Rs 1,00,000 per annum qualifies for IT Rebate under section 80C of IT Act.

All these may tempt one to go for NSC, but there are a few disadvantages too. Firstly, NSC is not liquid instrument. Once the NSC is purchased, one cannot withdraw money from it. The premature withdrawals can be done under specific circumstances only, such as death of the holder, forfeit by the pledge or under court's order.

Another major disadvantage is interest paid at the time of maturity is not tax-free. Only the soothing factor in that the interest accrued on NSC does not attract TDS (no tax deduction at source).

In short, considering the lower deposit rates offered by banks, NSC could be an ideal investment for those investors who are seeking tax benefits on a long term basis and are not bothered about liquidity.