Get a better loan deal by pledging national saving certificates

During this time of the year (January-March), many of us start struggling to arrange funds to make investments for claiming tax benefits.

Besides cash-flow issues, we have to confront the problem of making right choices with respect to lock-in period, return on investment and risk associated with the investment.

Moreover, this year the all-time high inflation has ensured that many taxpayers do not have enough money to make investments.

Also, for many of taxpayers, it is not possible to invest money for a longer period in view of commitments in the near future. But present provision of the Income Tax Act has products to meet needs of various taxpayers encompassing tenure, security and returns.

Here we discuss one such product available under Section 80C for tax deduction — National Saving Certificate (NSC) — which will shield you from the risk associated with volatility of rate of return expected.

Particularly if you do not have enough funds to invest and do not want to commit your money for a longer period, then it is ideal for you.

NSCs have tenure of six years and the rate of interest is not subject to any fluctuations based on the market conditions. The rate of interest is 8% and the interest is compounded half-yearly.

The interest is fixed at the time of issue of the certificate unlike the PPF account where the interest can be changed without any notice and that too on the investments made in the past. 

The most attractive part about NSCs is that you can obtain loans from banks against them.

Borrow to invest in NSCs
In case you are temporarily facing financial crunch to take benefit of deduction available under Section 80C, NSCs are best suited for you.

So if you do not have funds now, you can go to the extent of temporarily borrowing from your friends or relatives and buying NSCs to the extent of unutilised portion of the deduction available under Section 80C.

They offer flexibility with regard to mode of payment also; if you are paying in cash, the certificates are issued immediately. But if you pay by demand draft or cheque, the certificates are issued on realisation of the instrument. Therefore, it is advisable to tender cash and collect the certificates immediately.

Process for taking the loan
Once you receive the certificates from the post office you can approach any scheduled bank, cooperative bank or cooperative credit society to get a loan against security of these certificates.

It is advisable to approach the bank where you have banking relations so as to ensure faster disposal of your application. As per the rules governing NSCs, the post offices are authorised to mark pledged in favour of scheduled banks, cooperative banks and cooperative societies including cooperative credit societies in addition to certain other entities.

You have to make an application for marking pledged on the NSCs in favour of the lender, which has to be signed by both you and the lender.

Once you tender the NSCs together with the application for marking of the pledge, the post office will mark the pledge on the certificates and return the certificates to the bank.

On receipt of the NSCs duly marked as pledged, the bank will disburse the loan. You can repay this money which you have borrowed from your friend or relative. 

There are two options with regard to taking loan against security of NSCs — either you can take a flat loan against NSC and pay in monthly EMIs or you can obtain an overdraft facility against security of these.

In case you think your cash flow is volatile, taking an overdraft account gives you flexibility to use the funds as and when they are needed. However, if you expect to pay certain sum every month, taking a flat loan against NSC is advisable.

The process for obtaining the loan or overdraft against the NSCs is quite simple and not as expensive as any other unsecured loans such as personal loans or revolving your credit on credit cards. The banks normally grant you a loan up to 80% to 85% of the face value of the NSCs.

Rate of interest charged
The rate of interest charged on the loan against NSCs or overdrafts is very competitive and is lower than the rate charged on personal loans.

However, interest charged on the overdraft account is little higher than the flat loan against security of the NSC. In addition to the interest, you will have to pay one-time processing charges at 1% of the amount sanctioned. Generally, there are no prepayment charges on loan taken against NSC.

A word of caution
A lot of people are under the impression that both Kisan Vikas Patra and NSCs are eligible for deduction under Section 80C, which is not true. Only NSCs are eligible for deduction under Section 80C and not Kisan Vikas Patra.

Balwant Jain is CFO, ApnaPaisa.com, a price comparison engine for loans, insurance and investments. He can be reached at balwant.jain@apnapaisa.com.