Good rates, moderate tenure: What makes NSC a great debt instrument

Locking-in now would help investors earn 8 per cent for the next five years. In a falling interest rate regime, it would be a great advantage

With the financial year starting, many investors would be looking at lucrative investment options. The good news is that with elections round the corner, the government has not tinkered with the rates of small saving schemes despite two successive rate cuts by the Reserve Bank of India (RBI). However, there are expectations that once elections are over and the new government settles in, there will be pressure to cut rates of small saving schemes. Otherwise, the overall transmission of rate cuts that the RBI is worried about is unlikely to happen. 

For investors who want to lock-in their money now, a good option can be National Savings Certificate. For one, it is among the highest paying debt instruments, and the tenure is not too high. For example, the interest rate payable on NSC is 8 per cent whereas the country’s largest bank, the State Bank of India’s five-year fixed deposit will pay 6.85 per cent. Even if one decides to go for a private sector bank, the rates are higher, but marginally. HDFC Bank offers 7.25 per cent for its five-year fixed deposit. If you are looking for returns higher than 8 per cent, then you have to settle for lower credit quality or go for debt funds which are facing their own problems. The risk is also low because it is guaranteed by the government. “NSC is a useful instrument for conservative investors looking to combine investment with tax-saving under Section 80C. It is suited especially for senior citizens who enjoy higher tax-exempted interest income and seek assured returns, as well as for any investor seeking assured, moderate returns over the long-term,” says Adhil Shetty, CEO, Bankbazaar.com.

How do similar schemes fare? Yes, there are other instruments which offer similar or higher rates such as the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY). However, these schemes come with much longer tenure. More importantly, when the rates of small savings schemes are revised, the accumulated amount in these instruments will earn lower interest. Investors in NSC, however, won’t be impacted by the change in rates as the rate contracted at the time of investment continues till the time the instrument matures.

Clearly, investors will earn significantly more by investing in the scheme in a falling interest rate regime, which is quite possible in the coming months. “If someone invests in NSC, he will be eligible to earn 8 per cent a year returns for the next five years. Therefore, in a falling interest rate scenario, NSC will provide better returns. However, over the long-term, one should choose investment options depending on one’s goals,” .says Mohit Mittal, VP & Product Head, Investments, Bajaj Capital.

Tax benefits: And that is not the only reason. NSC also offers you tax benefit under section 80C of the Income Tax Act, up to an investment of Rs 1.5 lakh in a financial year — this is extremely handy for senior citizens who may not have employee provident fund anymore to get this benefit. In addition, you can also claim the interest accrued on it every year towards investment under section 80C from the end of the first year to the end of the fourth year. This works as the added benefit. The final interest income, however, is clubbed to your total income and taxed at the applicable tax rate.

Lock-in worries: One must note NSC comes with a lock-in period of five years, something that many investors do not like. However, they tend to forget that most 80C options come with a lock-in period. Though Equity-Linked Saving Schemes (ELSS) come with only three-year lock-in, they invest in shares and may not suit most conservative investors. However, Shetty says ELSS could be a better choice for moderate risk takers. “If you’re looking to invest in NSC for tax-saving, and if you can take a moderate market risk and remain invested for five years, you should certainly consider ELSS mutual funds which have lower tax incidence, a lower lock-in of three years, and provide the possibility of higher long-term returns,” he says.

Loan option: Since NSC cannot be liquidated before maturity, banks and non-banking financial companies are willing to offer you a loan against it. To make it a more attractive proposition, the rate of interest charged on loan against NSC are lower than the rate charged on a personal loan, as the lender can recover the money when NSC matures if the borrower fails to repay the loan on time. NSC scores high on all three parameters that conservative investors are seeking — safety, tax-adjusted returns and liquidity. That makes it a good investment for a conservative investor.