I am opening a NSC in my Son who is a Minor and 16 years old. Kindly Explain what are the Tax Implications? Can I Consider the Interest of NSC on a Cash Account Basis ? When the NSC Matures, My Son will become a major. Shall I include the NSC interest account in his name at the time when the NSC Matures and he becomes a major ?
Answer: Tushant July 19, 2023 Answer:
NSC or National Savings Certificate is a government savings bond that is useful for small investments and tax saving. Since it is backed by the government, it becomes a very low-risk investment.
If you are opening an NSC for your minor son, as the legal guardian, you will be able to avail tax deductions for it under Section 80C, up to a maximum of Rs 1.5 lakh in a financial year.
It may be pertinent to note that as per Circular No. 405 dated 15/01/1985, deduction under section 80C can be claimed by the person who has contributed the monies out of his income chargeable to tax.
Furthermore, the interest on NSC is accrued annually but is deemed to be reinvested and eligible for tax deduction.
Is the interest on NSC taxable?
The interest that accrues each year is accumulated in the account and then added to the original investment in the NSC account. This accumulated interest receives a tax rebate under Section 80C of the Income Tax Act.
Since the maturity period of NSC is 5 years, the interest can be reinvested only for 5 years. The interest earned in the 5th year is received by the investor along with the maturity amount. Essentially, the tax benefit is available only for the initial four years of the investment period. The interest earned in the fifth and final year is taxable.
Can I consider the interest of NSC on a cash account basis?
Interest income from investments is generally categorized under the "Income from Other Sources" (IFOS) head. IFOS can be taxed based on the method of accounting (either mercantile or cash basis) regularly employed by the taxpayer.
What if you gift the NSC to your minor son?
Any income earned by the minor child from any asset or investment gifted to him shall be clubbed in the hands of the parent only until the child reaches adulthood. As per the clubbing provision, such income is combined with the total income of the parent with a higher taxable income.
Once the child becomes an adult, the income will no longer be clubbed in the hands of the parents, and the child will be treated as a separate taxpayer. The adult child can choose the method of accounting he/she wants to opt for when reporting his/her income, which falls under IFOS.
