There was a time when Raju Gupta, a small-time Delhi-based tax consultant and distributor of post office saving schemes, had no time to “even breathe” in the last week of March. That was the week when taxpayers besieged him and his staff of six-odd agents with applications for tax saving investments. And topping the popularity charts were the National Savings Certificates (NSCs) issued by the post office.
Indeed, NSCs were for a long time the middle-class taxpayer’s favourite tax saving option. Investors flocked to them as flies to honey. What especially endeared to the layman was that NSCs were the simplest and easiest way of doubling his money. Before 2000, when the coupon rate on NSCs was 12%, an investment of Rs 10,000 grew to Rs 20,121 on maturity after six years. Regular investors used NSCs to build a lucrative cycle wherein the proceeds from maturing certificates were ploughed back to buy more of the same.
But this year, Gupta was sitting idle outside the post office while the “rush of March”—the mad scramble to make tax saving investments before the end of the financial year— was on. Rising interest rates and a new rule that extends tax deduction to even bank fixed deposits had weaned away a large chunk of investors from NSCs and other post office schemes.
While NSCs offer only 8% interest, bank fixed deposits offer up to 9-10% interest. If you are a senior citizen, you get an additional 0.5-1%. What’s more, you get your money back in five years instead of six. “We used to be up to our necks in work. But now only very few people invest in NSCs,” says the clerk who handles the NSC-related work at the post office branch where Gupta operates. The investments in NSCs at the branch is down almost 70-80%.UPS AND DOWNS |
| Safe haven: NSCs have attracted investors because of the safety factor. In the mid-1990s, when a liquidity crunch pushed up fixed deposit interest rates to 18-20%, investors continued to opt for the 12% offered by NSCs. |
| Good gets better:The NSC coupon rate was brought down to 8% by 2002. But the drop in FD rates to 5-6% still made them more attractive and investors made a beeline for 8% assured returns. |
| Administered death: An artificially high rate kept NSCs alive when interest rates were down. Now the reverse is happening—8% offered on NSCs is lower than market rate. |
The difference in returns is not the only reason for the waning interest. The NSCs thrived in an era when there were very few investment options before the taxpayer. All his investment decisions were dictated by the Finance Ministry.
Government policies decided where to invest in and in what proportion of the total tax sav -ing outlay. The only other safe tax saving option was the Public Provident Fund or a life insurance policy. But with a 15-year lock-in, a PPF account was less liquid than the six-year NSC. Insurance policies too required a long-term investing commitment.
Even for pure investment, NSCs were a safer option than fixed deposits with unrated companies and non-banking finance companies. A lot has changed in the past 10 years. The mutual fund industry has extended its depth and reach. Secondly, the stock markets are fairly well regulated and transparent today than ever before. Now it’s easier to spot the bad apples of the corporate sector. Enough reasons for investors to junk the low-yield NSCs in favour of high-growth equity tax plans of mutual funds.
For risk-averse investors, fixed deposits offer higher returns and ease of investment. Instead of searching out a post office, one can invest in a fixed deposit with his bank. “Only somebody from the back of beyond who is completely cut off from the present world would invest in an NSC today,” says Sandeep Nanda, director of investment advisory firm Securities Investments. Nanda advises risk-averse clients to invest in fixed deposits for tax savings. Others are advised to go in for equity-linked savings schemes.
Even for investors not looking to save tax there are better, more taxefficient options in the market today. For instance, fixed maturity plans (FMPs) of mutual funds have higher returns and the tax on profits are lower. While the interest earned from NSCs is clubbed with the investor’s income for the year and taxed accordingly, the profits from FMPs are treated as long-term capital gains if the holding period exceeds a year, and taxed at 10%.
The NSC is a relic of the past, an idea whose time has gone. Ironically, the death knell of this administeredrate instrument has been rung by policy changes. Two years ago, the Government removed Section 80L, which exempted interest income of up to Rs 12,000 in a year from tax. Even while thousands of small investors were mulling over the decision to invest, the RBI tightened the liquidity position that pushed up interest rates.
Last year, the Finance Ministry further queered the pitch for NSCs when it made bank fixed deposits of over five years eligible for tax savings under Section 80C. What remains to be seen is whether the next budget would be the last nail in NSC’s coffin.
