21 February 2016
Dear Sir, An assesse had purchased two no's of NSC one on April'2008 and another on May'2009. My question is whether the Interest on both the NSC is allowable as deduction under section 80C for the F.Y. 2014-15 relevant to A.Y. 2015-16.
Please reply as early as possible. Your valuable reply would be helpful for me.
21 February 2016
NSC interest is taxable. However, as it is a cumulative scheme (e.g. interest is not paid to the investor but instead accumulates in the account), each year’s interest is considered reinvested in the NSC. Since it is deemed reinvested, it qualifies for a fresh deduction under Sec 80C, thereby making it tax-free. Only the final year’s interest, when the NSC matures, does not receive a tax deduction as it does not get reinvested, but is paid back to the investor along with the interest of the earlier years and the capital amount.
What you must ensure while filing tax return?
To benefit from this feature of reinvested interest and its deduction, it is important to declare the accrued interest on NSC on a yearly basis in your tax return under the head “Income from Other Sources”. Under deductions, you will claim accrued interest for all the years except the last year under Sec 80C as reinvested NSC interest.
Both cancel each other out, making the interest in effect tax-free.
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