Interest earned on Kisan Vikas Patra (KVP) and National Savings Certificate (NSC) is subject to taxation under the Income Tax Act. According to tax experts, both schemes offer guaranteed returns but differ significantly in their tax treatment. KVP interest is fully taxable every year and does not qualify for any deduction under Section 80C, while NSC interest can be claimed as a deduction under Section 80C, subject to the overall limit of ₹1.5 lakh. The tax treatment varies based on the specific scheme and investment period. As reported by Mihir Tanna, Associate Director (Direct Tax) at SK Patodia & Associates LLP, the interest earned on both NSC and KVP is taxable under the head 'Income from Other Sources', with NSC enjoying a unique tax advantage under the old tax regime because the interest accrued every year is deemed to be reinvested.
Taxpayers have the option to declare NSC and KVP interest either on an accrual basis or on a receipt basis while filing their income tax return. As reported by tax expert Balwant Jain, the method chosen must be followed consistently every year. Interest from KVP or NSC is taxable, and taxpayers can offer NSC or KVP interest either on an accrual basis or on a receipt basis, but the method has to be followed consistently year after year. This consistency requirement ensures proper tax compliance across all years of investment.
Certain small savings plans can help taxpayers avoid taxes under Section 80C of the Income Tax Act, with investments of up to ₹1.5 lakh in a financial year qualifying for a deduction. According to CA Abhishek Soni, CEO and Co-founder of Tax2Win, the interest accrued on NSC every year (except in the year of maturity) is deemed to be reinvested and can also be claimed as a deduction under Section 80C, subject to the overall limit of ₹1.5 lakh. However, in the year of maturity, the final year's interest is taxable and does not qualify for the deduction. For KVP, the interest is fully taxable every year and does not qualify for any deduction under Section 80C. As explained by Mihir Tanna, 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). For example: you open NSC of ₹1 lakh during FY 25-26, and interest earned is ₹7,000; so taxable interest income is ₹7,000, and deduction under the old tax regime is ₹107,000 as interest is reinvested.
The government reviews and announces interest rates on small savings schemes every quarter. For the July-September 2026 quarter, interest rates were announced on June 30, 2026, and no changes were made. According to the latest rates, KVP continues to offer 7.5% annual interest with an investment maturing in 115 months, while NSC continues to offer 7.7% annual interest (compounded annually). These rates remain unchanged from the previous quarter, providing stability for investors in these government-backed schemes. As reported by Mihir Tanna, in case of the new regime, no deduction is available; so in ITR, only interest income will appear in income from other sources.
Tax experts advise taxpayers to check the interest reflected in their Annual Information Statement (AIS) before filing their ITR and ensure that it matches their own records to avoid any mismatch. As reported by experts, this verification process helps prevent discrepancies that could lead to tax-related complications. The consistency in reporting method and verification of interest amounts are crucial for maintaining proper tax compliance and avoiding potential discrepancies with government records. With the 31 July deadline for tax submission for financial year 2025-26 approaching, it is essential for all individuals who invest in these schemes to carefully understand the core differences in tax reporting between the investment options to ensure compliance with tax authorities and avoid notices.
