Jigar M. Patel
International Tax Attorney
Highlights of the National Savings Scheme, 1987
The National Savings Scheme (NSS) was introduced in 1987 and remained effective until 1992. Popularly known as an EET (Exempt-Exempt-Tax) investment, Section 80CCA of the Income-tax Act prescribed deduction to individuals and HUFs for the specified amount of investment made under the Scheme. It was further provided that the annual interest, ranging as per the Small Savings Interest Rules, notified from time to time, would be exempt from income-tax. However, on withdrawal of any amount from the NSS account, the same would be liable to tax being treated as income from other sources. It was further provided that TDS u/s. 194EE would also be made at the time of withdrawal.
Major Attraction for Individuals to hold NSS investment intact
While withdrawals by an investor from the account during his lifetime attracted tax as referred to hereinabove, a special provision was made under Section 80CCA to the effect that in case of the closure of the NSS Account after the death of the individual investor, the proceeds receivable by the legal heirs of the deceased would be completely exempt and not attract any liability to income-tax. This was a major attraction for individuals who had invested in the scheme during the period 1987 to 1992, to hold their investment in the scheme intact, even after the same was discontinued.
Investors who had invested in the range of around Rs. 1.5 to Rs. 2 lakhs, during the tenure of the Scheme, were happy to see their account grow to up to Rs. 18 to 20 lakhs from inception until 2024.
DEA Notification – Tax Knock, a Shock for NSS Investors
The Department of Economic Affairs (DEA) of the Ministry of Finance, came out with a notification on 29-08-2024 announcing that effective 1st October, 2024, no interest would be paid on the balances in NSS Accounts. This sudden tax knock came as a huge shock, particularly for individual NSS investors who had loyally stuck to their original investment planning to hold on to the same until their death and pass over the maturity proceeds to their legal heirs, with a view to reap the valuable tax saving through exemption of both principal and accrued interest over the years.
There was a big hue and cry amongst the NSS investors, most of whom were senior citizens, who were deeply concerned about the loss of interest on one hand and on the other the grave tax impact caused pursuant to the withdrawals. This led to frantic representations also being made to the Finance Minister.
Soothing Tax Balm for NSS in the Finance Bill 2025
Responding positively to the genuine concerns of the NSS investors, largely comprising of senior citizens, the Finance Minister announced in her budget speech that the Finance Bill 2025 had proposed to exempt withdrawals made by individual taxpayers from their NSS accounts, on or after 29th August, 2024, being the date of the DEA notification.
Section 80CCA has been suitably amended to grant this tax exemption. However, it needs to be noted that this exemption will be limited to only individual taxpayers and incase of withdrawals made by any HUF, the provisions for taxability u/s. 80CCA shall be duly attracted.
Missing amendment in respect of relief from TDS required
Although the Finance Bill has granted retrospective relief in respect of all withdrawals from NSS made on or after 29th August, 2024, quite surprisingly, corresponding relief, even with prospective effect, in regard to TDS u/s. 194EE in case of individual taxpayers entitled to tax exemption is missing. The FM needs to be sensitized of the same and it can only be earnestly hoped that suitable relief is introduced before the Finance Bill is passed.
