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Today I will show you how you can reduce your tax liability on Interest you earned by investing in NSC. Many investors may not know how to do it. As you all know, interest you receive on your investment in NSC is taxable when it matures. It is taxable income under the head of “Income from Other Sources”. But their is a way to reduce a bit by following your accrued  interest on yearly base. Before discuss further, we will glance at the features of NSC.

Tenure-5 Yrs and 10 Yrs

Min Amount-Rs.100

Interest rate-8.4% for 5 yrs deposit and 8.7% for 10 yrs deposit (Compounding Half Yly)

Tax Benefit-Avail upto Rs.1,00,000 by investing in NSC under Sec 80C of Income Tax.

Maturity Taxation-Interest is taxable under the head of “Income from Other Source”

Suppose you invested Rs.100 in 5 Yrs maturity NSC then you will get the tax exemption under Sec 80C when you invest. Hence after 5 year you earn Rs.50.89, which is taxable income under the head of “Income from Other Source”. But how to reduce tax liability on interest you earned? First you need to show each year’s accrued interest as income under the head of “Income from Other Source”. Afterwards for the same amount of interest you can avail deduction under Sec 80C as re-invested in NSC. But you can avail this facility till 4th year for 5 Yr Maturity NSC. I will show in below table how you can avail in below tableyou below, how much you can claim as re-investment for each year.

So, till the 4th year interest you can claim as re-investment and avail deduction. Suppose you didnt claimed yearly interest then the maturity accrued interest of 5th year will be calculated as Income from Other Source and it can be taxed as per your tax slabs. Hence it is better to claim on yearly base till 4th year to avail the exemption benefit (About NSC Tenure-10Yr, when I contacted local Post Office, even they dont have clarity about that.  Hence I avoided to mention about 10 Yr NSC). Hope this posting may benefit a lot of people. Happy Saving!!!