[sbinews] Small Savings and Tax REbate

  • From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Mon, 22 Dec 2003 20:28:08 +0500

Will you bite the rebate?

NSC as an investment option offers interest rate of 8%, fixed yield of 8.16%, 
no TDS and interest re-investment for Section 88 benefit... Deepa Gopalan 
profiles the tax-saving instrument 

The public provident fund (PPF) is usually the first choice as far as claiming 
benefits under Section 88 of the Income-tax Act is concerned. But in the 
investment process, what gets left out are the various other tax-saving 
instruments that are also available for investors. 

In fact, while maintaining the same level of safety and returns, there are 
other instruments that offer better liquidity also giving Section 88 tax rebate 
benefits at the same time. 

The National Saving Certificate (NSC) is one such case. Offering an interest 
rate of 8%, this one comes with a fixed yield of 8.16% for six years, no tax 
deducted at source and an added benefit of interest re-investment for Section 
88 benefits. 

The yield is higher than the PPF (8%). NSC is also far more attractive then 
infrastructure bonds where the rates have been plummeting below 6%, and the 
interest income on the bonds not even qualifying for the 80L benefit. 

However, NSC has one drawback compared with PPF or insurance — its interest is 
taxable unlike PPF or even insurance. 

However, the interest still qualifies for Section 80L benefits — which exempt 
interest income up to Rs 12,000 from tax. So, if you have not exhausted your Rs 
12,000 limit under 80L limit, this instrument is just for you. 

Another highlight is that the interest earned by your original investment in 
NSC is deemed to be reinvested in the same instrument and qualifies for tax 
benefits under Section 88. 

No other tax-saving instrument in the market offers this benefit. For instance, 
if you invest Rs 70,000 in NSC in the first year, which earns an interest of Rs 
5,600 at the year end, next year you would have to invest Rs 5,600 less to get 
the same rebate under Section 88. 
 In other words, you need to invest Rs 64,400, and not Rs 70,000, to enjoy the 
full rebate of 15% or 20%, according to your total income figure. 

In terms of liquidity, too, NSCs, with their six-year tenure, have the 
advantage of better liquidity than PPF. PPF requires locking your money for 15 
years (though partial withdrawal is allowed from the seventh year). 

The biggest advantage is that NSCs can be encashed prematurely, although only 
the face value is given within a year of issue. If these are encashed after a 
year but before three years, then simple interest on the face value, at the 
rate applicable from time to time, is paid. 

The difference between the accrued interest and the simple interest is the 
discount rate, which is specified by the government from time to time. (See 
table for premature encashment) 

More importantly, interest rates on PPF can be changed through their 15-year 
tenure, as seen from the drop from 12% to 8% in the last three years. 

There are no such problems with NSCs, as you remain locked in  — say 8% — 
through its six-year tenure. NSCs are available in denominations of Rs 100, Rs 
500, Rs 1,000, Rs 5,000 and Rs 10,000, and are redeemable without deduction of 
tax at source (unlike infrastructure bonds, which are redeemed only after tax 
deduction if it exceeds Rs 5,000 for the financial year). 

The certificates are easily transferable from one person to another through the 
post office. There is a nominal fee for registering the transfer. One can also 
avail of a loan against the certificates by pledging it to a bank. 

A bank will have the NSC assigned in its favour and advance a percentage of up 
to 75% of face value plus the amount of accrued interest till the date of 
taking the loan. 

So assuming that you want to make an investment of say Rs 10,000 in NSC, at the 
end of six years, you will receive Rs 16,010. One would have to calculate the 
interest each year on the certificates for adding it to the income. 

According to Rule 15 of the NSC (VIII issue) Rules, 1989, the interest accrued 
is specified in a table. So the amount taxed at the end of year one would be Rs 
8,16, in the second year it would be Rs 8,83 and so on. 


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