National Savings Certificate Scheme is a scheme launched by the govt to promote the habit of savings amongst the common man and to channelize these savings in the right direction for the benefit of the whole country. Under this scheme, deposits are accepted by the govt through Post Offices and the amount generated through these deposits is used for the growth of the country.
To encourage the taxpayer to invest in this scheme, the govt has allowed this Investment in National Savings Certificate (NSC) to be claimed as a tax deduction under Section 80C which helps the tax payer in reducing his tax burden.
Although this Interest on National Savings Certificate is taxable, this Interest is not paid to the account holder but is reinvested in NSC. As this Interest is re-invested in National Savings Certificate which is a specified instrument u/s 80C, a taxpayer can claim this amount of interest as a tax deduction under Section 80C.