On August 29, 2024, the Ministry of Finance, vide the Department of Economic Affairs, came out with a directive that from October 1, 2024, all balances credited to the accounts of the erstwhile National Savings Scheme (last discontinued in 2002) subscribers will no longer earn any interest, a significant tweak to the scheme. By effectively nullifying the return profile of such investments made in the National Savings Scheme (NSS) for the investors, exiting the scheme was one of the prudent choices that was and is out there.

But a thorn in the way was the existing rule of the taxman to tax the withdrawals of all such interest credited and deposits made in that year of withdrawal.

Please note that the NSS is different from the prevalent National Savings Certificate, which is also a small savings scheme, exempted under section 80C and remains unchanged.

History

Section 80CCA of the Income Tax Act calls for a tax-saving deduction in favour of any investments made in the NSS, amidst others. But eligible deductions in the scheme are those investments made prior to April 1, 1992, and any investments later did not qualify as a tax-saving investment. While the scheme was discontinued from 2002, the government, however, continued to honour the interest obligations on these instruments.

Now, with nil interest earnings post September 2024, it was expensive to let the money stay idle in the NSS accounts, thanks to opportunity cost. Also, the withdrawal option was made expensive, thanks to a provision in the tax rulebook that withdrawal of any amount standing to the credit of the taxpayer is to be added to the taxable income of the withdrawing taxpayer and subject it to tax in that same financial year.

However, the withdrawal on closure of such NSS accounts due to death of the depositor was not chargeable to tax in the hands of the legal heirs.

Exemption granted

But the Budget tweaked the law to provide exemption to such withdrawals made on or after August 29, 2024.

Considering that the depositors of the NSS should be somewhere near their retirement, if not already retired (assuming investors would have at least been of 18 years in 1992), this exemption granted should significantly help them.

This amendment comes into effect retrospectively from August 29, 2024, (the date of the directive) and exempts all such withdrawals from the NSS post that date. And though the investors of the NSS are not just individual taxpayers, the exemption is extended to the individual taxpayers only.

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