With the July 31 ITR deadline approaching, investors in NSC and KVP must report interest correctly. Only NSC interest qualifies for a Section 80C deduction under the old tax regime.
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The July 31 deadline for filing income tax returns for FY 2025-26 is a week away. Investors holding National Savings Certificates or Kisan Vikas Patra face a common question: how to report the interest. Both are government-backed savings instruments. Their tax treatment differs in one key respect.
Interest from both NSC and KVP is taxable under the head 'Income from Other Sources'. The difference: NSC interest is deemed reinvested each year, making it eligible for a deduction under Section 80C under the old tax regime. KVP interest does not get that benefit.
Mihir Tanna, Associate Director (Direct Tax) at SK Patodia & Associates LLP, explained the mechanics. "In case of NSC, interest is reinvested. Thus, interest income is added as income from other sources in ITR, and deduction is taken u/s 80C in ITR (if the old tax regime is obtained)." He gave an example: an NSC of ₹1 lakh opened during FY 2025-26 earning ₹7,000 in interest would show ₹7,000 as taxable income. The investor could then deduct ₹1,07,000 under Section 80C because the principal and the reinvested interest both qualify.
"For KVP, the interest accrued each year is not deemed to be reinvested as NSC and does not qualify for a deduction under Section 80C, under the old tax regime," Tanna said. "In case of the new regime, no deduction is available; so in ITR, only interest income will appear in income from other sources."
The government sets interest rates for small savings schemes quarterly. For the July-to-September 2026 quarter, rates were announced on June 30 and left unchanged from the prior quarter. As of July 24, KVP offers 7.5% annual interest with a maturity of 115 months. NSC offers 7.7% compounded annually.
For taxpayers filing under the old regime, the Section 80C deduction on NSC interest can reduce taxable income. KVP investors get no such offset. Under the new tax regime, neither instrument offers a deduction; only the interest income is reported. The key is to report interest from both under 'Income from Other Sources' and, for NSC under the old regime, claim the corresponding deduction in the same return.
This article is for informational purposes only and not tax advice. Tax rules may change. Readers should consult a qualified tax professional before filing.
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