National Savings Scheme Stops Interest Payments: What to know

Investors who, nearly four decades ago, entrusted the National Savings Scheme (NSS) with the responsibility of saving for the future and providing for dependents have been told to withdraw their money by September 30, 2024. NSS account holders were recently advised of this deadline following a directive issued by the government earlier this year, which also stated that interest payments would stop as of October 1, 2024.

The directive asked depositors to update their KYC (Know Your Customer) information, as most account holders’ accounts were still active despite the scheme’s official closure in 2002. Depositors were personally notified at post offices that after September 30, any balance in their account would not earn any further interest.

A government notification, titled “National Savings Scheme (Amendment) Rules, 2024” outlined the main points related to interest structure and withdrawal requirements:

• Rate of Interest: The rate was maintained at 7.5% per annum from March 1, 2003, until September 30, 2024. This interest rate remained unchanged, with no further interest crediting allowed after October 1, 2024.
• Calculation Method: Interest was calculated monthly on the lowest balance between the 10th day and the last day of each month. This ensured that the interest credited was based on the account’s balance over time.
• Credit Timing: Interest earned during each financial year was credited at the end of the year.

After October 1, 2024, the policy shifted significantly, and NSS account balances no longer accrue interest. This unexpected change impacted account holders relying on NSS interest for financial growth, as balances would no longer increase.

What Does This Change Mean for NSS Depositors?

Accounts that received contributions before October 1, 2024, continued to earn 7.5% interest per annum up until September 30, 2024. Account holders are encouraged to monitor their balances closely and understand how the interest cessation affects them going forward.

For new deposits or accounts under NSS opened after October 1, 2024, no interest will accrue. Given that the scheme no longer provides any returns, investors may wish to explore alternative savings or investments offering potentially higher returns.

With the end of interest payments, NSS depositors may need to revise their investment strategies. These changes create an opportunity to evaluate other savings or investment plans that align better with their long-term financial objectives.

The National Savings Scheme (NSS) was launched in 1987 and continued until 1992. It was ultimately closed in 2002, but the government continued paying interest on existing accounts. Over the years, some depositors withdrew their investments, closing their accounts and declaring withdrawals as taxable income, while others left funds in active accounts to continue earning interest.

Under NSS, depositors could invest up to Rs 40,000 annually and benefit from tax deductions under Section 80C of the Income Tax Act, 1961. After a four-year lock-in period, depositors could withdraw their principal and accrued interest. Initially, NSS offered a high-interest rate of 11%, which gradually declined to 7.5%.

Tax Implications and Recent Changes

According to the scheme’s rules, funds withdrawn from NSS are taxed in the year they’re withdrawn; however, any retained interest remains tax-free. In case of a depositor’s death, heirs can withdraw the funds tax-free, allowing account holders to maintain accounts over long periods without tax implications.

As of July 12, further changes took effect. Accounts opened under the 1987 NSS rules continued earning interest at prevailing rates, while accounts opened afterward accrued interest at the post office savings rate of 6%, with an additional 200 basis points on the balance.

Reducing the NSS interest rate to zero has significantly impacted senior citizens who relied on the scheme for financial security. This change has raised tax concerns, disrupted financial planning, and shaken confidence in government-backed savings options.