NSC interest: the 80C top-up and the tax at maturity

A five-year certificate with a tax quirk

The National Savings Certificate (NSC) is the post office's five-year, lump-sum savings certificate. You buy it for any amount from ₹1,000 upwards, in multiples of ₹100, with no maximum. For the October–December quarter of FY 2026-27 it pays 7.7% a year, compounded annually, and the rate you buy at is locked for the full five years. Nothing is paid out until maturity: ₹1,000 grows to ₹1,449.03.

The money is locked in. Early encashment is allowed only on the holder's death, forfeiture by a pledgee, or a court order, though the certificate can be pledged as security for a loan. The NSC calculator gives the maturity value for any amount, and the small savings guide sets NSC beside PPF, KVP and the rest.

What makes NSC unusual is how its interest meets the ₹1.5 lakh deduction that was section 80C and, since 1 April 2026, is section 123 of the Income-tax Act, 2025. The limit and the rules did not change with the number.

Year by year on ₹1 lakh

The interest is never paid to you before maturity. The law treats each year's interest as reinvested in the certificate, and a reinvestment in NSC is an investment that qualifies for the deduction. So in years 1 to 4 you declare the accrued interest as income from other sources and claim the same amount as a deduction. If you have room under the limit, the two cancel. In year 5 there is no reinvestment, so that year's ₹10,360 is taxed with nothing to offset it.

Over the five years, ₹34,544 of the ₹44,903 can be sheltered this way. The other ₹10,360 cannot.

The catch: the room has to be free

The top-up only works if your ₹1.5 lakh is not already full. For many salaried people it is. Employee EPF contributions, life insurance premiums, the principal part of a home-loan EMI and children's tuition fees count first, as our 80C comparison sets out. If those fill the limit, the reinvested interest adds no deduction and is simply taxed every year. The section 80C calculator shows how much room you have.

It also works only in the old regime. The new regime, now the default, allows no deduction for NSC at all, so all the interest is taxable. Settle the regime question first: the old vs new regime calculator runs both, and our post on old vs new for FY 2026-27 explains when deductions are worth keeping.

There is a quieter benefit for someone who buys a certificate every year. The accrued interest on older certificates fills part of each new year's limit, so less fresh money is needed to reach ₹1.5 lakh.

What is left at maturity

Two cases, on ₹1 lakh, with the 4% cess added to the slab rate (20.8% and 31.2%):

As a yearly return after tax, the first case is 7.38% at the 20% slab and 7.22% at 30%. The second is 6.27% and 5.53%. That gap, 1.69 points a year at the 30% slab, is what the reinvestment rule is worth when it applies.

None of this counts the deduction on the ₹1 lakh you put in. In the old regime with room, that saves ₹20,800 at the 20% slab and ₹31,200 at the 30% slab in the year you buy, a separate benefit that every 80C option shares.

If you never declared the interest as it accrued, the whole ₹44,903 is income in the year of maturity. You lose the yearly offsets, and a large lump in one year can push part of your income into a higher slab.

Against a tax-saver FD and ELSS

A five-year tax-saver FD also earns the deduction on the principal and also locks you in. At the 7% the FD calculator uses as a representative rate, compounded quarterly, ₹1 lakh grows to ₹1,41,478 before tax. FD interest is taxed every year with no reinvestment deduction, so after tax it leaves ₹1,31,692 at the 20% slab and ₹1,27,044 at 30%: 5.66% and 4.90% a year. Even NSC's worse case, 5.53% at the 30% slab, comes out ahead, and NSC carries no TDS. Bank rates vary, and senior citizens are usually offered more, so put your own bank's rate into the calculator. Our post on tax on FD interest covers the FD side.

The other common choice is an ELSS fund, with a three-year lock-in instead of five and gains taxed as long-term capital gains above ₹1.25 lakh a year. It is equity, so it can be worth less than you paid at the end of three years; NSC cannot. ELSS and 80C and the ELSS calculator cover that trade.

Mistakes to avoid

• Claiming the deduction without declaring the income. The yearly interest is income and a deduction at the same time. Claim one without the other and the return does not add up.
• Forgetting year five. The final year's interest is taxable with no offset, even if every earlier year cancelled out.
• Buying for a deduction you do not get. Under the new regime NSC is a 7.7% taxable deposit locked for five years. That may still suit you, but judge it on that basis. The KVP calculator and PPF calculator show the neighbouring options.
• Expecting early access. There is none outside death, a pledge or a court order.

Rates are notified quarterly by the Ministry of Finance and are on India Post; the deduction rules are on the Income Tax Department portal. This post explains the arithmetic and is not tax advice or a recommendation.