National Savings Schemes (NSS)

CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)

11 August 2010

National Savings Schemes (NSS)

National Savings Scheme (NSS) offers an assured return and tax rebates under Section 88 of the Income Tax Act, 1961. The rate of interest is 9 per cent per annum, compounded annually.

NSS has a duration of four years as compared to NSC, which has a duration of six years. You can extend the duration of your NSS units thereafter if you so desire.

NSS does not offer the benefits of liquidity. There is no premature withdrawal facility except in case of the death of the holder. However, the interest accrued on NSS can be withdrawn at any point. The deposit (principal) can be withdrawn only on maturity of the instrument at the end of four years and the account can be closed at the discretion of the investor.

Features:

NSS is mostly viewed upon as a tax-saving instrument. It combines growth in money (capital appreciation) with cuts in tax outgo, albeit at a lower rate.
NSS is not meant for earning regular income. It serves primarily as an instrument to reduce tax liability.
Since the NSS has a fixed rate of return, it cannot provide adequate safeguards against high inflation rates.
It is a savings plan that also offers tax benefits, and it cannot be pledged as security to any bank for availing a loan.
Your income is assured at the specified rate of interest. Since the NSS has the backing of the GOI, this is a risk-free avenue of investment.
The NSS has the backing of the Government Of India. Therefore, you can be assured of getting back your full investments. This is a safe option to go in for, as the risks are minimal.
Since the NSS is backed by the Government Of India, it requires no commercial rating, and is deemed to be a risk-free investment.

Return:
NSS has a duration of four years as compared to NSC, which has a duration of six years. You can extend the duration of your NSS units thereafter if you so desire.

Advantages:
National Savings Scheme units are issued in various denominations with the minimum investment being Rs 100. There is no prescribed upper limit on investment. However, the scheme offers a coupon of 9 per cent as compared to 9.5 per cent offered by NSC. Moreover, the interest is compounded annually as against semi-annually in NSC.

The NSS offers tax incentives as per the provisions of the Income Tax Act, 1961. You can avail of rebates on both the principal invested as well as the interest income under Section 88 of the Income Tax Act. The annual interest income qualifies for exemption under Section 80L, i.e., interest income upto Rs 9,000 is tax-exempt. Moreover, interest income is not subject to TDS.

NSS units are held physically in the form of certificates that are issued to the investors by the post office.

How to start:
NSS is available at post offices across the country. You can open only one account in a year. There is no prescribed upper limit to the amount you might want to invest in the scheme. Accounts cannot be opened by an investor in the name of his/her spouse. But you can avail of the nomination facility to nominate any person as the beneficiary.

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Post Office Time Deposit Scheme

A Post-Office Time Deposit Account (RDA) is a banking service similar to a Bank Fixed Deposit offered by Department of post, Government of India at all post office counters in the country. The scheme is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of one year to two years, three years and a maximum period of five years. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Time Deposits scheme return a lower, but safer, growth in investment.

Features:

Time Deposits can be made for the periods of 1 year, 2 years, 3 years and 5 years. The minimum investment in a post-office Time deposit is Rs 200 and then its multiples and there is no prescribed upper limit on your investment.

Account may be opened by an individual, Trust, Regimental Fund and Welfare Fund.

The account can be closed after 6 months but before one year of opening the account. On such closure the amount invested is returned without interest. 2 year, three year and five year accounts can be closed after one year at a discount. They involve a loss in the interest accrued for the time the account has been in operation.

Interest is payable annually but is calculated on a quarterly basis at the prescribed rates. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account.

One can take a loan against a time deposit with the balance in your account pledged as security for the loan.

Returns:
This investment option pays annual interest rates between 6.25 and 7.5 per cent, compounded quarterly. Time deposit for 1 year offers a coupon rate of 6.25%, 2-year deposit offers an interest of 6.5%, 3 years is 7.25% while a 5-year Time Deposit offers 7.5% return.

Duration of Account

Quarterly Compound Interest

1year

6.25%

2 years

6.5%

3 years

7.25%

5 years

7.5%

Advantages:
In this scheme your investment grows at a pre- determined rate with no risk involved. With a Government of India-backing, your principal as well as the interest accrued is assured under the scheme. The rate of interest is relatively high compared to the 4.5% annual interest rates provided by banks. Although the amount invested in this scheme is not exempted as per section 88 of Income Tax, the amount of interest earned is tax free under Section 80-L of Income Tax Act.

How to start a Time Deposit:
A Time Deposit account can be opened at any post-office in the country. Account may be opened by an individual, i.e., Single, Joint A/B (not more than two adults) Trust, Regimental Fund and Welfare Fund. On opening a Time Deposit, you will receive an account statement stating the amount deposited and the duration of the account. The account can be closed after 6 months of opening the account. On such closure the amount invested is returned with/without interest depending on the time the deposit was maintained.