Interest income from NSC investment is taxable. The annual accrued interest is not paid to the investor, but, instead, gets accumulated in the account itself. So, each year's interest for the first five years is considered reinvested. Since it is deemed reinvested, it qualifies for a fresh deduction under Section 80C, thereby making it tax-free. The interest so earned is added in ‘other income’ and treated as part of deduction under Sec 80C. Only the sixth year’s interest, when the NSC matures, does not receive a tax deduction as it doesn’t get reinvested. The reinvested amount after maturity is not taxable.