To combat market volatility and ensure predictable, safe returns, many investors choose investment options such as the National Savings Certificate (NSC) and the Kisan Vikas Patra (KVP) to build a diversified portfolio.
Both investment options are government-backed savings instruments that aim to provide investors with stable returns. However, their tax treatment differs slightly.
This is especially evident when reporting interest income in the Income Tax Return (ITR). Having a clear understanding of these fundamental differences can help taxpayers avoid reporting errors and omissions and claim the appropriate eligible tax benefits.
This becomes even more important as 31 July, the last date of tax submission for the financial year 2025-26, is just a week away. Keeping this in mind, let us take a look at how interest from these government-backed investment savings instruments is taxed.
How interest from NSC and KVP is taxed
The first point to keep in mind is that the interest earned on both NSC and KVP is taxable under the head ‘Income from Other Sources’. However, NSC enjoys a unique tax advantage under the old tax regime because the interest accrued every year is deemed to be reinvested, making it eligible for deduction under Section 80C, subject to the overall limit. Kisan Vikas Patra (KVP), on the other hand, does not receive this benefit even though its interest is taxable.
Mihir Tanna, Associate Director (Direct Tax), SK Patodia & Associates LLP, Chartered Accountants, explains, “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.”
He further added, “Although both schemes generate taxable interest, NSC offers an additional tax benefit. The interest accrued each year in KVP is not deemed to be reinvested as NSC and does not qualify for a deduction under Section 80C, under the old tax regime. In case of the new regime, no deduction is available; so in ITR, only interest income will appear in income from other sources.”
Significance of reporting interest correctly in your ITR
Therefore, to ensure compliance with tax authorities and avoid notices, it is wise for all individuals who invest in these schemes to carefully understand the core differences in tax reporting between the investment options.
In short, taxpayers should report interest from both NSC and KVP under the ‘Income from Other Sources.’ The key distinction is that only NSC investors under the old tax regime can claim a corresponding Section 80C deduction on accrued interest, whereas KVP interest remains taxable without any such deduction.
What are the latest small savings rates for these investment options?
Every quarter, the government announces interest rates for small savings schemes after diligent review. For the current quarter, i.e., July to September 2026, the interest rates were announced on 30 June 2026, and no subsequent changes were made from the earlier rates applicable in the previous quarter.
As a result, as of 24 July, the Kisan Vikas Patra continues to offer investors an annual interest of 7.5% with an investment maturing in 115 months, whereas NSC continues to provide investors with 7.7% annual interest compounded every 12 months.
Disclaimer: This article is for informational purposes only and should not be considered tax or financial advice. Tax rules may change; readers are advised to consult a qualified tax professional before making decisions or filing returns.