Deposits in National Savings Scheme won’t yield any interest after Sept 30

Depositors who invested in the National Savings Scheme (NSS) over 37 years ago to secure their financial future and that of future generations were instructed to withdraw all their funds by September 30. And from October 1 onwards, interest payments on these accounts have ceased, as per the latest government directive.

Investors in NSS were notified to update their KYC (Know Your Customer) information. Notably, while the NSS was discontinued in 2002, many depositors still owned active accounts in the scheme.

Depositors were being personally informed at post offices that if they do not withdraw their deposits by September 30, no further interest will be paid on the funds.

History of the NSS and its interest rates

The NSS was first launched in 1987 and subsequently closed in 1992. It was briefly reopened in 1992 but finally discontinued in 2002. Despite this, the government continued to pay interest on existing deposits.

Over the years, many depositors withdrew their investments. They closed their accounts, declaring the amounts in their income for tax purposes. However, some depositors left their funds in the accounts, which remain active today.

Under the scheme, depositors were allowed to invest around ₹40,000 per year, and the amount invested was tax-deductible under Section 80C of the Income Tax Act, 1961.

After the lock-in period of four years, depositors could withdraw their deposits and the interest earned. At its inception, the NSS offered a high interest rate of 11%, but over time, this was reduced to 7.5%.

Tax implications and recent changes

The official rules state the amount withdrawn from the NSS becomes taxable in the year it is withdrawn. However, if the depositor does not withdraw the funds, the interest earned remains tax-free as long as it stays in the account.

If a depositor’s heirs withdraw the funds after the depositor’s death, the entire amount is considered tax-free. This provision allowed many account holders to keep their accounts open for years.

However, changes were introduced in the scheme starting July 12. Under these modifications, those who opened accounts under the 1987 scheme continued to earn interest at the prevailing rate. For accounts opened later, interest was calculated at the post office savings rate of 6% plus an additional 200 basis points on the balance.

These adjustments were only applicable for the period from July to September. For irregular or third-party accounts, no interest would be paid, and only the principal amount would be returned to the depositors.

From October 1, no interest will be paid on any NSS accounts, making it pointless for depositors to keep these accounts open.

This government decision has left many depositors displeased.