Short answer: Money you put into National Savings Certificates (NSC) can be deducted from taxable income under section 123 of the Income-tax Act, 2025 (the old section 80C), within the overall ₹1.5 lakh limit, but only if you choose the old tax regime. The interest is taxable, though interest for the first four years is treated as reinvested and can also count towards the same ₹1.5 lakh. NSC currently pays 7.7% a year for October–December 2026, compounded annually, over five years.
Last updated: 13 October 2026.
This article was first written in 2022 and contained some errors that were common online at the time, such as a ₹2.5 lakh limit and tax-free interest. We have rewritten it for 2026, after the Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026.
What changed since 2022
- New law, new section numbers. The Income-tax Act, 2025 applies from tax year 2026-27. The investment deduction formerly under section 80C is now in section 123, with eligible investments listed in Schedule XV. The limit remains ₹1,50,000.
- New regime is the default. Under the new regime (section 202 of the 2025 Act), the section 123 deduction is not available. NSC saves tax only if you opt for the old regime.
- Higher rebate under the new regime. With the rebate now in section 156, many salaried people with taxable income up to ₹12 lakh pay no tax in the new regime and get no extra benefit from NSC.
- Interest rate. NSC now pays 7.7%, compared with 6.8% for much of 2022.
NSC at a glance (2026)
| Feature | Details |
|---|---|
| Who can invest | Resident individuals, alone or jointly; a guardian on behalf of a minor |
| Interest rate | 7.7% a year for October–December 2026, compounded annually, paid at maturity |
| Tenure | 5 years |
| Minimum investment | ₹1,000, then in multiples of ₹100 |
| Maximum investment | No upper limit (deduction capped at ₹1.5 lakh) |
| Where to buy | Post offices, and online where India Post offers it |
| Premature closure | Only on death of the holder, forfeiture by a pledgee, or a court order |
| Use as collateral | Can be pledged to banks, NBFCs and housing finance companies for a loan |
| Risk | Government-backed small savings scheme |
The rate on your certificate is fixed for its full term at the rate prevailing on the day you buy it, even if later quarters change. The detailed scheme rules, including pledging and premature encashment, are published by the National Savings Institute.
How the tax benefit works
1. Deduction on the amount invested
In the old regime, the amount you invest in NSC in a tax year can be claimed under section 123, along with other eligible items such as EPF contributions, PPF, ELSS, life insurance premiums, home loan principal and children’s tuition fees. The combined limit is ₹1,50,000.
2. Interest is taxable, but partly deductible
NSC interest is not tax-free. It is taxable as income from other sources. However, interest that accrues in years one to four is deemed to be reinvested, so it can be claimed as a fresh deduction in that year, within the ₹1.5 lakh limit. The fifth year’s interest is not reinvested and is simply taxable. In effect, if you have room under the limit, the deduction offsets the tax on the reinvested interest.
There is no TDS on NSC interest, so you must report it yourself in your return. Many taxpayers report it every year on an accrual basis so that they can claim the reinvestment deduction.
Worked example: ₹1 lakh in NSC
Neha (an illustrative example) invests ₹1,00,000 in NSC in October 2026 at 7.7%.
| Year | Interest accrued | Value at year end | Tax treatment (old regime) |
|---|---|---|---|
| 1 | ₹7,700 | ₹1,07,700 | Taxable; deemed reinvested, deductible |
| 2 | ₹8,293 | ₹1,15,993 | Taxable; deemed reinvested, deductible |
| 3 | ₹8,931 | ₹1,24,924 | Taxable; deemed reinvested, deductible |
| 4 | ₹9,619 | ₹1,34,544 | Taxable; deemed reinvested, deductible |
| 5 | ₹10,360 | ₹1,44,903 | Taxable; not reinvested |
At maturity she receives about ₹1,44,903. If she is in the 30% slab under the old regime and has room under the ₹1.5 lakh limit, the ₹1,00,000 deduction saves her about ₹31,200 in the year of investment (30% plus 4% cess). In later years, the deduction for reinvested interest offsets tax on that interest, as long as she still has room under the limit. If her EPF contributions already use the full ₹1.5 lakh, NSC gives no additional tax saving.
Who should consider NSC
- Old-regime taxpayers who still have room under the ₹1.5 lakh limit after EPF, insurance and home loan principal.
- Conservative savers who want a fixed, government-backed return and do not need the money for five years.
- People who may need a secured loan later, since NSC can be pledged.
- Not ideal for those in the new regime, those who need liquidity, or long-term investors seeking inflation-beating growth.
NSC compared with other tax-saving options
| Option | Lock-in | Return (as of Oct–Dec 2026 where official) | Tax on returns |
|---|---|---|---|
| NSC | 5 years | 7.7%, fixed for term | Interest taxable; years 1–4 deemed reinvested |
| PPF | 15 years | 7.1%, can change quarterly | Tax-free |
| ELSS mutual funds | 3 years | Market-linked, not guaranteed | Capital gains tax applies |
| 5-year tax-saver bank FD | 5 years | Varies by bank | Interest taxable; TDS may apply |
| Senior Citizens’ Savings Scheme | 5 years | 8.2% | Interest taxable |
For older savers, the Senior Citizens’ Savings Scheme may pay more. For long horizons, see reasons to consider ELSS and our guide on beating inflation over the long term.
Old regime or new: run the numbers first
NSC only makes sense for tax if the old regime works out cheaper for you. That usually happens when your deductions, such as section 123 investments, home loan interest and HRA, are large. Compare your tax under both regimes before investing; the Income Tax Department’s e-filing portal and our income tax hub explain the current slabs. Related guides: how employees can save tax, tax on life insurance premiums and home loan interest.
How to buy and manage NSC
- Visit a post office with KYC documents (PAN, Aadhaar, photograph), or use India Post’s online banking if you have a post office savings account with that facility.
- Fill in the application, choose single or joint holding, and add a nominee.
- Pay by cheque, transfer or other accepted mode. The certificate is issued in electronic form or as a passbook entry.
- Keep the record; you will need it at maturity or for a pledge.
- Report the interest in your tax return each year.
Need cash before maturity? Premature encashment is not allowed except in limited cases, but you can pledge NSC to a bank or NBFC as security. Compare that with other options before borrowing.
Need funds without breaking your savings? Compare secured and personal loan offers from RBI-regulated lenders.
See also our government savings schemes hub for PPF, SCSS, KVP and Sukanya Samriddhi.
Frequently asked questions
Is NSC interest tax-free?
No. NSC interest is taxable. Interest for the first four years is deemed reinvested and can be claimed as a deduction under section 123 in the old regime, within the ₹1.5 lakh limit; the fifth year’s interest is taxable without that benefit.
Can I claim NSC under the new tax regime?
No. The section 123 deduction (formerly 80C) is not available under the new regime, which is the default under the Income-tax Act, 2025.
What is the NSC interest rate now?
7.7% a year for the October–December 2026 quarter. The rate on a certificate stays fixed for its five-year term.
Can I withdraw NSC before 5 years?
Only in limited cases, such as the death of a holder, forfeiture by a pledgee or a court order. For liquidity, you can pledge it for a loan instead.
Is there TDS on NSC?
No TDS is deducted on NSC interest, so you need to include it in your income tax return yourself.
Sources
Disclosure: FundsTiger (Gatimaan Finance Advisors Pvt. Ltd.) is a loan marketplace and lending service provider for RBI-regulated lenders. Aparampaar Finance Pvt. Ltd. (Omozing), one of those lenders, is a related party of FundsTiger. This article is general information, not financial advice. Read your loan agreement and KFS before you decide.