What is an NSC?
The National Savings Certificate (NSC) is a fixed-income investment scheme backed by the Government of India. Available at Post Offices, it is designed to encourage small or mid-size savings and comes with a fixed lock-in period of 5 years.
Taxation and Reinvestment
NSCs are highly popular because they offer tax benefits under Section 80C. You can claim a deduction of up to ₹1.5 Lakh for the principal amount invested.
More importantly, the interest earned on an NSC is compounded annually but paid out only at maturity. Because this interest is automatically reinvested, the interest accrued each year (except the final year) also qualifies for a Section 80C deduction.
While the reinvested interest is tax-exempt for the first four years (under Section 80C limits), the interest earned in the 5th and final year is not reinvested and will be fully taxable according to your income tax slab.