The National Savings Certificate (NSC) is one of India’s most loved small savings products. You put money in at the post office, it earns a fixed 7.7% interest, and five years later you get it back with interest. The tax part is where most investors get confused: is the interest taxable, what is the “deemed reinvestment” rule everyone talks about, and what changes under the new Income-tax Act, 2025? This guide answers all of it in plain words.
Quick answer — Is NSC interest taxable? Yes. Interest on a National Savings Certificate is taxed every year as “Income from Other Sources” on an accrual basis, even though you get no cash until maturity. For the first four years, the interest is treated as reinvested in the NSC, so you can claim the same amount as a deduction under Section 80C (Section 123 from Tax Year 2026-27) — but only if you file under the old tax regime and still have room under the ₹1.5 lakh limit. In the fifth year, the interest is fully taxable with no deduction. No TDS is deducted, so you declare the interest yourself in your ITR.
NSC key numbers (Oct–Dec 2026)
| Item | Detail |
|---|---|
| Certificate | NSC (VIII Issue), 5-year term |
| Interest rate | 7.7% per annum, compounded annually, paid at maturity |
| Rate status | Unchanged for the 10th straight quarter (Finance Ministry OM, 30 September 2026 — the rate was last changed in Q4 2023-24) |
| Rate lock | The rate on the day you buy applies for the full five years |
| Minimum investment | ₹1,000; no maximum |
| Who can invest | Resident individuals, minors through a guardian |
| Who cannot | HUFs and trusts |
| Lock-in | Strict 5 years — early closure only on death of the holder, a court order, or forfeiture by a pledgee (Gazetted officer) |
| TDS on interest | None — you report it yourself |
Maturity example: ₹1,00,000 at 7.7% compounded annually grows to ₹1,44,903.38 after five years — total interest ₹44,903.38.
How interest on a National Saving Certificate is taxed, year by year
Here is exactly what happens each year on a ₹1,00,000 certificate (old regime):
| Year | Interest earned (₹) | Tax treatment |
|---|---|---|
| 1 | 7,700.00 | Declared as income, but claimed as 80C deduction (deemed reinvested) → net tax nil |
| 2 | 8,292.90 | Same → net tax nil |
| 3 | 8,931.45 | Same → net tax nil |
| 4 | 9,619.18 | Same → net tax nil |
| 5 | 10,359.85 | Fully taxable as “Income from Other Sources” — no 80C deduction |
Two ideas run this table:
- Accrual basis. The law taxes interest when it is earned each year, not when you receive it at maturity.
- Deemed reinvestment. For years 1–4, the accrued interest is treated as if you reinvested it in a fresh NSC. Since NSC is an eligible 80C instrument, that same amount qualifies for a deduction in that very year. Income and deduction cancel each other out — so the interest effectively costs you nothing in tax.
The 80C headroom caveat (read this before assuming zero tax)
The years 1–4 deduction only works if you have unused 80C room left in that year. The ₹1.5 lakh ceiling is shared with PPF, ELSS, LIC premiums, EPF and home-loan principal. If your limit is already full, the accrued interest is still taxable income — you just get no offset, and the NSC behaves like an ordinary fixed deposit for tax.
Also note: the deduction belongs to the year the interest accrues, not the year of maturity. If you skip declaring the interest in years 1–4 and report everything in year 5, you lose the four years of deductions — and the lump sum can push you into a higher slab. Declare it annually.
What changed and what stayed (from Tax Year 2026-27)
| Changed | Stayed |
|---|---|
| Section 80C is renumbered Section 123 under the Income-tax Act, 2025 (applies from Tax Year 2026-27, i.e., 1 April 2026) — same ₹1.5 lakh cap, same deemed-reinvestment rule | Interest still taxed annually on accrual as “Income from Other Sources” |
| — | 5-year lock-in, 7.7% rate mechanics, and no TDS |
| — | Old-regime-only benefit (the new regime, the default since FY 2023-24, never allowed 80C) |
How do I report NSC interest in my ITR?
- Compute the year’s accrued interest using the schedule above or the post office’s maturity-value table. Keep a one-page record per certificate: purchase date, amount, rate, and the five yearly figures.
- Open Schedule OS (Other Sources) in your ITR and enter the accrued interest for the year as “Interest from NSC”.
- If you have 80C/Section 123 room (old regime only), claim the same amount in Schedule VI-A as a deduction under NSC. The return nets the two automatically.
- In the maturity year, enter the final year’s interest in Schedule OS and claim no deduction. The principal you receive is a return of capital — not income — so it is not declared.
- Check your AIS before filing. India Post’s reporting of NSC interest has been expanding, so the figure may now appear in your Annual Information Statement — reconcile any difference before you submit.
Most salaried investors with income up to ₹50 lakh and no capital gains can do all of this in ITR-1 (SAHAJ).
Can I withdraw NSC early?
No — not in normal circumstances. The five-year lock-in is strict. Premature closure is allowed only in three cases: the death of the holder (nominee/legal heir claims it), a court order, or forfeiture by a pledgee who is a Gazetted officer. If you need liquidity, many banks accept an NSC as collateral for a loan — you do not have to break the certificate.
NSC vs PPF vs KVP — which suits you?
| Feature | NSC | PPF | Kisan Vikas Patra |
|---|---|---|---|
| Rate (Oct–Dec 2026) | 7.7% fixed for 5 years | 7.1% (reviewed quarterly) | 7.5% fixed, matures in 115 months (~9.5 years) |
| Interest tax | Taxable yearly (offset years 1–4) | Fully tax-free under Section 10(11) | Taxable yearly, no offset |
| 80C deduction | Up to ₹1.5 lakh (old regime) | Up to ₹1.5 lakh (old regime) | None |
| Lock-in | 5 years (strict) | 15 years | ~9.5 years |
| Early exit | Death / court order / pledgee forfeiture only | Partial withdrawal after the 7th year; premature closure only for specified reasons | Death / court order / pledgee forfeiture only |
| Liquidity | Can be pledged for bank loans | Loan/withdrawal facility within the rules | Can be pledged for bank loans |
| Best for | A 5-year goal with a deduction and manageable taxable interest | Long-term, tax-free growth | A higher fixed rate when you do not need a deduction |
Choose NSC if you want a shorter lock-in plus a deduction and you file under the old regime. Choose PPF for completely tax-free returns over a long horizon. Choose KVP if you simply want the highest fixed rate and do not care about tax benefits. For more on the other two, see our guides on PPF tax benefits and ELSS tax-saving funds, and the full Chapter VI-A deductions list.
Frequently asked questions
Is NSC interest taxable?
Yes. It is taxed every year as “Income from Other Sources” on an accrual basis. In years 1–4 you can offset it with a matching Section 80C/123 deduction (old regime, within the ₹1.5 lakh limit); in year 5 the interest is taxed with no offset.
How does the deemed reinvestment 80C rule work year by year?
The interest that accrues in years 1–4 is treated as reinvested in the NSC, and that same amount qualifies for an 80C deduction in that year — so income and deduction cancel out. It works only to the extent you have 80C headroom left. In year 5 the certificate matures, so there is no reinvestment and no deduction.
Is TDS deducted on NSC interest?
No. Unlike bank FDs, the post office deducts no TDS on NSC interest. You must compute and declare the accrued interest yourself every year while filing your return.
How do I declare NSC interest in my ITR?
Enter the year’s accrued interest in Schedule OS (Other Sources) as “Interest from NSC”. If you have 80C/Section 123 room under the old regime, claim the same amount in Schedule VI-A. In the maturity year, enter the final year’s interest in Schedule OS with no deduction.
What happens in the year of maturity?
You receive the principal plus all accumulated interest. The principal is return of capital and is not income. Only the fifth year’s interest (₹10,359.85 on a ₹1 lakh certificate) is new taxable income that year.
Can I withdraw NSC early?
Only on the death of the holder, a court order, or forfeiture by a pledgee. Otherwise the five-year lock-in cannot be broken — but you can pledge the certificate to a bank for a loan.
NSC vs PPF vs KVP — which suits whom?
Pick NSC for a 5-year lock-in with a tax deduction; PPF for tax-free growth over 15 years; KVP for the highest fixed rate (7.5%) when you do not need a deduction. Under the new tax regime, where no 80C deduction exists, PPF’s tax-free interest makes it the clearest choice of the three.
Official sources
- Finance Ministry Office Memorandum, 30 September 2026 — small savings rates for Q3 FY 2026-27 unchanged, NSC at 7.7% (dea.gov.in)
- India Post — National Savings Certificate (VIII Issue) scheme details and maturity-value table (indiapost.gov.in)
- Income-tax e-filing portal — ITR forms and Schedules OS/VI-A (incometax.gov.in)
- National Savings Institute — small savings rate history (nsiindia.gov.in)
Reviewed by Asuthod Rathod, CA
Last updated: 23 October 2026
Disclaimer: This article is for general information only. Tax laws may change and individual circumstances vary. Please consult a qualified tax professional before making investment or tax-filing decisions.
Editorial byline for eircicai tax saving guides — covering 80C investments, ELSS, PPF, NPS, and regime comparison. Content is reviewed by Asuthod Rathod, CA.