Can Still Avail Section 80C Tax Deduction Without Other Investments if You Invest in NSC

The current financial year is ending in a few days, and it is the last chance for taxpayers to save on taxes. Many individuals use Section 80C as it allows them to claim tax deductions for certain investments. However, you can claim deductions only if you select the old tax regime. Those opting for the new tax regime cannot claim a deduction under Section 80C.

To claim deductions under Section 80C, you must make certain investments or expenses. However, there is an option that does not require such action. This means that even without taking any action in the current year, you can still be eligible for a Section 80C deduction. This is through the National Savings Certificate (NSC).

What is a National Savings Certificate?

The National Savings Certificate (NSC) is a fixed-income investment scheme that can be opened with any post office branch. This is a government-backed scheme that offers reliable returns along with tax benefits under Section 80C of the Income Tax Act.

Interest received for an investment in National Savings Certificates (NSC) is eligible for tax deduction under Section 80C, even if the investment was made years ago. Therefore, it is not mandatory to invest in the same financial year in which you are claiming the tax deduction.

An expert clarifies the reason behind this. He explains that interest earned on the NSC in the first four years is considered reinvested in the scheme. Therefore, it qualifies for a tax deduction under Section 80C, and you can claim a deduction up to Rs.1.5 lakh in a financial year. However, the interest earned in this scheme is taxable each year under the heading “Income from Other Sources” on an accrual basis. If you’re following the old tax regime, you can claim a corresponding deduction under Section 80C for this interest.

Interest Earned in NSC under Section 80C qualifies for Deduction Only up to the 4th Year

The maturity period for National Savings Certificates (NSC) is five years. The interest earned during the first four years is eligible for a Section 80C tax deduction. However, the interest earned in the fifth year of your NSC is not eligible for the Section 80C deduction. So, while the interest from the first four years can help reduce your tax liability, the interest in the fifth year will not qualify for this benefit.

This is because the last year, i.e., the fifth year, is the year of maturity of NSC. For the first four years, the interest earned on the NSC is reinvested, and therefore, it qualifies for deduction under Section 80C. However, in the fifth year, the interest is no longer reinvested, and that is why it does not qualify for a tax deduction under Section 80C. As a result, this interest will be taxable in the hands of the taxpayer according to their applicable income tax slab rate.