This is taxing time of the year. All of us have to make good the shortfall in the investment required to be made for availing the tax benefits available for investments. Since the equity are very volatile and since the time left is very short a lump sum investment is not advisable in Equity Linked Saving Schemes. Moreover some of the tax payers have reached in the age group where their ability to tax risk is substantially reduced. Some of your may not have the time longer time available like PPF where money generally gets locked for 15 years.
In this article I am going to discuss an investment product which will be useful for the people who do not want to take any risk associated with the ups and down associated with equity market as well as the interest rate cycles. This is a product which can come to your rescue in case you do not have enough money to invest and still want to avail the tax benefits. Yes I am talking about National Saving Certificates (NSC).
The NSCs have a tenure of five years. Moreover the interest which you will earn on this investment is not subject to any change in future and is fixed when you buy the certificates. For the NSC issued till 31st March the rate of interest is 8.50% and is fixed for the entire tenure of five years of the certificates. So this guards you against the changes in the interest rates which applies in case of other debt investment like PPF. Moreover in case of PPF the changed interest rate becomes applicable on the accumulated balance. So in the present interest rate cycle where the rates are expected to come down, it makes sense for you to lock you interest rate of the next five years.
You can avail credit facility against the security of the NSC
For the tax payers who are out of cash during the part of the year, this investment product is very useful as you can borrow money against security of the NSC purchased. This facility of borrowing against your investment in the NSC makes is unique in the sense that you can avail full tax benefits without putting in substantial money from your pocket. Please mind that this is suggested in case you have temporary cash crunch.
So in you do not have enough liquidity right now to invest in the eligible investment products, you can take help of NSC to tide over the temporary liquidity problem. This can be done by buying the NSC by temporarily borrowing from your personal sources to the extent you have headroom available under Section 80C.
The NSCs are handed over to across the counter in case the money is tendered in cash. However for payments made through demand draft, or cheques, you will have to wait till the instrument is realized by the post office.
Procedure to be followed for availing the loan:
The NSC certificates enable you to avail loan from the banking yststem. The facility can either be by way of a term loan or it may be just an overdraft facility against security of these NSC.
In case the liquidity problem is temporary, you can avail the over draft facility and pay of the loan once you have enough liquidity. However in case you are genuine out of cash, you should take term loan and repay the loan by way of Equated Monthly Installments (EMI).
For availing the credit facility against these NSC, you will have to apply for getting a lien marked on the NSC in the records of the post office from where these have been issued. Once the lien is recorded on the NSC, the lender will be able to release the funds needed by you.
After the lien is recorded on the NSC, you will get the money from the lender which can be used to discharge the temporary loan taken to buy the NSCs.
Please note that the lender will not give you loan for the full amount of the NSC but will only lend you with a margin of 15% to 25%, means you will be able to get the loan for an amount equal to 75% to 85% of the face value of the NSC. The amount of loan available would be higher in case the NSC were bought a few years back.
Cost of borrowing against NSC
The lender will charge you an interest on the money lent to you. The rate of interest will vary from lender to lender and that too on whether you have taken term loan or an overdraft facility. The rate of interest is higher in case of OD facility as compared to term. Presently the rate of interest is in the range of 11% to 13%.
I am sure a few of you must be contemplating making investments in NSC by temporarily borrowing and avail the tax benefits before the year ends.
(Balwant Jain is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. He can be reached at firstname.lastname@example.org)