National Savings Certificate (NSC): Taxation of Interest Under Old and New Tax Regimes

What is a National Savings Certificate?

National Savings Certificate, commonly known as NSC, is a Government-backed small savings scheme available through India Post. It is generally used by individuals looking for a fixed-return investment with a five-year tenure.

As of 18 August 2026, India Post displays an interest rate of 7.7% per annum, compounded annually and payable at maturity.

One important feature of NSC from an income-tax perspective is that the interest is not tax-free. Although the investor normally receives the accumulated interest only when the NSC matures, interest accrues during the tenure and has income-tax implications.

The tax impact differs depending on whether the taxpayer follows the old tax regime or the new tax regime.

Is NSC interest taxable?

The Income Tax Department states that accrued interest on NSC is taxable in the hands of the investor. For years other than the final year, the accrued interest is also treated as reinvested in NSC for the purpose of the applicable investment deduction under the old tax regime.

For an individual holding NSC as an investment, the interest is generally taxable under the head Income from Other Sources.

Under the Income-tax Act, 1961, the corresponding provision is section 56. Under the Income-tax Act, 2025, Income from Other Sources is covered by section 92.

NSC taxation under the old and new tax regimes

Tax treatment of NSC under the old tax regime

Under the old tax regime, NSC can have two separate tax consequences:

1. Deduction for the original amount invested in eligible NSC.
2. Deduction for interest that is treated as reinvested during the tenure.

Deduction for original NSC investment

For years governed by the Income-tax Act, 1961, investment in qualifying NSC is covered by section 80C.

From Tax Year 2026-27 under the Income-tax Act, 2025, the corresponding investment deduction is provided under section 123 read with Schedule XV.

The overall eligible investment deduction is restricted to ₹1,50,000, subject to applicable conditions.

The ₹1,50,000 limit is not an NSC-specific limit. It is shared with other qualifying investments and payments covered by the relevant provision.

For example, if the taxpayer has already utilised the entire eligible deduction through provident fund contribution, life insurance premium or other qualifying investments, an additional NSC investment may not provide any further deduction.

How is annual NSC interest taxed under the old regime?

NSC interest is compounded annually. Accordingly, interest accrued during a year becomes part of the certificate value and earns further interest in subsequent years.

Under the tax treatment recognised by the Income Tax Department:

• Accrued NSC interest is taxable.
• Interest accrued during the tenure, other than the final year, is treated as reinvested.
• The deemed reinvestment may qualify for the applicable investment deduction under the old regime, subject to the overall limit and other conditions.

Does this make NSC interest tax-free?

No. The interest remains taxable.

Therefore, taxpayers should not simply omit NSC interest from taxable income.

Why is the final year's interest treated differently?

During the first four years of a five-year NSC, the interest remains invested in the certificate and becomes part of the amount on which subsequent interest is calculated.

In the fifth year, however, the NSC matures. The final year's interest becomes payable along with the maturity proceeds and is not reinvested for another year.

Therefore:

• Years 1 to 4: Interest is taxable and may qualify for deemed reinvestment deduction under the old regime.
• Year 5: Interest is taxable but no deduction is available for deemed reinvestment.

NSC taxation under the new tax regime

The tax treatment is different where an individual follows the new tax regime.

Under the Income-tax Act, 2025, section 202 governs the new tax regime. Most deductions under Chapter VIII, including the deduction under section 123 for eligible investments such as NSC, are not available while computing income under the new tax regime, except for specifically permitted deductions.

Accordingly, under the new regime:

• The original NSC investment does not provide the section 123 deduction.
• Annual NSC interest remains taxable.
• Interest treated as reinvested does not provide a section 123 deduction.
• Interest for the fifth year is also fully taxable.

Example: Taxation of ₹1,00,000 invested in NSC

Assume an individual invests ₹1,00,000 in an NSC carrying interest at 7.7% per annum compounded annually.

The above figures are illustrative and rounded.

The total interest over the five-year period is approximately ₹44,903.

Treatment under the old tax regime

The original ₹1,00,000 investment may separately qualify for deduction in the year of investment, subject to the overall ₹1,50,000 limit.

What if the deduction limit is already exhausted?

Suppose a taxpayer has already claimed:

• Employee provident fund contribution: ₹1,20,000
• Life insurance premium: ₹30,000

The total eligible deduction limit of ₹1,50,000 has already been utilised.

If ₹8,293 of NSC interest accrues during the year, the ₹8,293 remains taxable. The taxpayer cannot claim an additional deduction merely because the interest is deemed to be reinvested.

Treatment under the new tax regime

At what rate is NSC interest taxed?

There is no separate concessional tax rate for ordinary NSC interest.

The taxable interest is generally added to the taxpayer's other normal income and taxed according to the slab rates applicable under the selected tax regime.

The actual tax liability therefore depends on factors including:

• Total taxable income
• Tax regime selected or applicable
• Available deductions
• Applicable slab rate
• Eligibility for rebate
• Surcharge and cess, wherever applicable

Should NSC interest be reported every year?

Taxpayers should not assume that income arises only at maturity because the interest is not credited to their bank account every year.

NSC interest accrues and compounds within the certificate. The Income Tax Department's NSC-specific guidance recognises the accrued interest as taxable and, except in the final year, treats it as reinvested for deduction purposes under the applicable old-regime provision.

For an ordinary individual investor, annual reporting of accrued interest also avoids treating the entire accumulated interest as fresh income only in the maturity year.

Where should NSC interest be reported in the ITR?

For an individual holding NSC as an investment, accrued taxable interest would ordinarily be reported under Income from Other Sources, subject to the structure of the applicable income-tax return form.

Where the old tax regime applies, the eligible investment or deemed reinvestment deduction should be claimed separately under:

• Section 80C for years governed by the Income-tax Act, 1961; or
• Section 123 read with Schedule XV for Tax Year 2026-27 onwards under the Income-tax Act, 2025.

Income-tax Act, 1961 vs Income-tax Act, 2025

Common mistakes regarding NSC taxation

1. Assuming NSC interest is completely tax-free

NSC interest is taxable. A deduction for deemed reinvestment under the old regime does not convert the interest into exempt income.

2. Not reporting interest because nothing was received in the bank account

NSC interest compounds within the certificate. The absence of an annual cash payment does not, by itself, make the accrued interest non-taxable.

3. Claiming NSC deduction under the new tax regime

The traditional investment deduction for NSC is generally not available under the new tax regime.

4. Claiming the final year's interest as reinvestment

The final year's interest is not treated as reinvested because the certificate matures at the end of the tenure.

5. Assuming deemed reinvestment creates an unlimited deduction

Any deduction remains subject to the overall statutory investment deduction limit.

6. Confusing a deduction with an exemption

Under the old regime, NSC interest is first taxable. An eligible deduction may then reduce taxable income separately.

Does investing in NSC mean the old regime is always better?

No. The fact that a taxpayer has invested in NSC does not automatically mean that the old tax regime will result in lower tax.

Under the old regime, NSC investment and eligible deemed reinvested interest may contribute towards the ₹1,50,000 investment deduction limit. Under the new regime, this deduction is generally not available, but the new regime has a different slab structure.

The suitable regime therefore depends on the taxpayer's complete income, deductions, exemptions and other circumstances.

Practical takeaway

Therefore, NSC should not be described as a tax-free investment. It is more accurately described as a Government-backed savings instrument where the investment and eligible deemed reinvestment may provide deduction benefits under the old regime, while the interest itself remains taxable.

For Assisted Service, please WhatsApp us on +91-9320546101 or raise a support ticket here