Elderly citizens can invest in the Senior Citizens Savings Scheme as it offers triple benefits of safety, liquidity and regular periodic income
THE search for safe investment avenues offering regular income begins as one approaches the retirement age. Schemes that offer capital appreciation coupled with security are the most desired. Being guided by such a principle, the Government of India had announced a special scheme known as Senior Citizen Savings Scheme or SCSS in 2004 to cater to such needs of the senior citizens. In a short span it became very popular with people, however, attractive rates on bank fixed deposits last year overshadowed the scheme. Now, with falling deposit rates, the scheme could make it to the limelight again.
However, the biggest shortcoming of the scheme is that the interest earned on it is taxable. If the interest income in a year is more than Rs 10,000, then the TDS (tax deducted at source) is cut. However, with the recent amendment an investment up to Rs 1,00,000 in this scheme in a year is exempted under Section 80C of the Income Tax Act. So, for our readers, we offer details of the scheme and help to find out if it is a better option among several other available options.
Only those who have completed 60 years or above are eligible for the SCSS. However, a person who has completed 55 years and opted for voluntary or any special retirement scheme, can avail this scheme subject to certain conditions.
Since it is tailor-made for the old people it has some special features.
First, it offers a fixed rate of return at 9% per annum, higher than the returns offered on other fixed income instruments like PPF and NSC.
Second: the interest income is paid out every quarter. Usually, it is the last working day of every quarter. There is no alternate option available like yearly interest payment or cumulative interest at the time of maturity.
Third: though the tenure is fixed for 5 years, premature withdrawal after a year is permissible which ensures better liquidity to meet unforeseen expenses. But it involves some cost. If the deposit account is closed after the first year, but before the second year, 1.5% of the principal amount is deducted, otherwise it is 1% of the principal amount once the scheme completes two years.
Bedsides this, one has the choice to extend the scheme for another three years on maturity at the interest rate prevailing then. The minimum amount to be invested is Rs 1,000 while the maximum investment could be Rs 15 lakh, however, the investment needs to be in multiples of Rs 1000. Also, one has the option to open more than one account, but has to maintain a gap of one month. The accounts could be opened in an individual’s name or he has the liberty to open an account jointly with spouse. Joint account with anyone else is not allowed. Thus, one can have more than one account but the cumulative investment has to be within a limit of Rs 15 lakh.
The scheme suffers from a perception that the scheme could be opened with the post office only. However, it is not true. Some designated branches of nationalised banks and the ICICI bank are authorised to receive deposits under the scheme.
Prima facie this scheme looks attractive. But is it really worth investing? To answer this question we need to compare the scheme with other available investment avenues with similar features. A bank FD has almost all these features. However, the current deposit rates offered on bank FDs are in the range of 7-7.5%. Few banks offer additional interest benefit to senior citizens in the form of 25-50 basis points higher. Thus, the interest rate offered for senior citizens could be in the range of 7.25-8%, less than 9% offered on SCSS. So, compared to bank deposits SCSS definitely looks attractive at this juncture. Now, how does SCSS compare against MIS (Monthly Income Scheme) offered by post offices in India, which has similar features? The MIS offers 8% fixed rate of return. However, the interest is paid monthly. The tenure is also six years. So, to compare the two schemes we have considered the returns under SCSS over six years. Let us suppose Mr A deposited Rs 1,00,000 under SCSS, while Mr B kept Rs 1,00,000 with the post office under MIS. Mr A will receive Rs 2,250 every quarter till the end of the sixth year and he will get principal amount of Rs 1,00,000 back on maturity. Thus the total interest payout over 6 years will be Rs 54,000.
On the other hand, Mr B will receive around Rs 660 every month, which comes to Rs 2,000 every quarter till the end of sixth year, which is Rs 250 less than the quarterly receipts under SCSS. But here is a catch. A bonus of 5% on principal amount is paid under MIS at the time of maturity. Thus Mr B will receive Rs 1,00,000 along with Rs 5,000 as bonus at the end of sixth year. Thus, the total proceeds over six years turn out to be Rs 53,000 for Mr B. It shows there is hardly any difference in the total proceeds received under MIS or under SCSS over the tenure. But if one is in need of more money to spend periodically then the SCSS is a better option as it leaves more money in the hand of investors every quarter.
To sum up we can say elderly citizens should invest a portion of their retirement corpus in the Senior Citizen Savings Scheme as it offers safety, liquidity and regular periodic income.
THE search for safe investment avenues offering regular income begins as one approaches the retirement age. Schemes that offer capital appreciation coupled with security are the most desired. Being guided by such a principle, the Government of India had announced a special scheme known as Senior Citizen Savings Scheme or SCSS in 2004 to cater to such needs of the senior citizens. In a short span it became very popular with people, however, attractive rates on bank fixed deposits last year overshadowed the scheme. Now, with falling deposit rates, the scheme could make it to the limelight again.
However, the biggest shortcoming of the scheme is that the interest earned on it is taxable. If the interest income in a year is more than Rs 10,000, then the TDS (tax deducted at source) is cut. However, with the recent amendment an investment up to Rs 1,00,000 in this scheme in a year is exempted under Section 80C of the Income Tax Act. So, for our readers, we offer details of the scheme and help to find out if it is a better option among several other available options.
Only those who have completed 60 years or above are eligible for the SCSS. However, a person who has completed 55 years and opted for voluntary or any special retirement scheme, can avail this scheme subject to certain conditions.
Since it is tailor-made for the old people it has some special features.
First, it offers a fixed rate of return at 9% per annum, higher than the returns offered on other fixed income instruments like PPF and NSC.
Second: the interest income is paid out every quarter. Usually, it is the last working day of every quarter. There is no alternate option available like yearly interest payment or cumulative interest at the time of maturity.
Third: though the tenure is fixed for 5 years, premature withdrawal after a year is permissible which ensures better liquidity to meet unforeseen expenses. But it involves some cost. If the deposit account is closed after the first year, but before the second year, 1.5% of the principal amount is deducted, otherwise it is 1% of the principal amount once the scheme completes two years.
Bedsides this, one has the choice to extend the scheme for another three years on maturity at the interest rate prevailing then. The minimum amount to be invested is Rs 1,000 while the maximum investment could be Rs 15 lakh, however, the investment needs to be in multiples of Rs 1000. Also, one has the option to open more than one account, but has to maintain a gap of one month. The accounts could be opened in an individual’s name or he has the liberty to open an account jointly with spouse. Joint account with anyone else is not allowed. Thus, one can have more than one account but the cumulative investment has to be within a limit of Rs 15 lakh.
The scheme suffers from a perception that the scheme could be opened with the post office only. However, it is not true. Some designated branches of nationalised banks and the ICICI bank are authorised to receive deposits under the scheme.
Prima facie this scheme looks attractive. But is it really worth investing? To answer this question we need to compare the scheme with other available investment avenues with similar features. A bank FD has almost all these features. However, the current deposit rates offered on bank FDs are in the range of 7-7.5%. Few banks offer additional interest benefit to senior citizens in the form of 25-50 basis points higher. Thus, the interest rate offered for senior citizens could be in the range of 7.25-8%, less than 9% offered on SCSS. So, compared to bank deposits SCSS definitely looks attractive at this juncture. Now, how does SCSS compare against MIS (Monthly Income Scheme) offered by post offices in India, which has similar features? The MIS offers 8% fixed rate of return. However, the interest is paid monthly. The tenure is also six years. So, to compare the two schemes we have considered the returns under SCSS over six years. Let us suppose Mr A deposited Rs 1,00,000 under SCSS, while Mr B kept Rs 1,00,000 with the post office under MIS. Mr A will receive Rs 2,250 every quarter till the end of the sixth year and he will get principal amount of Rs 1,00,000 back on maturity. Thus the total interest payout over 6 years will be Rs 54,000.
On the other hand, Mr B will receive around Rs 660 every month, which comes to Rs 2,000 every quarter till the end of sixth year, which is Rs 250 less than the quarterly receipts under SCSS. But here is a catch. A bonus of 5% on principal amount is paid under MIS at the time of maturity. Thus Mr B will receive Rs 1,00,000 along with Rs 5,000 as bonus at the end of sixth year. Thus, the total proceeds over six years turn out to be Rs 53,000 for Mr B. It shows there is hardly any difference in the total proceeds received under MIS or under SCSS over the tenure. But if one is in need of more money to spend periodically then the SCSS is a better option as it leaves more money in the hand of investors every quarter.
To sum up we can say elderly citizens should invest a portion of their retirement corpus in the Senior Citizen Savings Scheme as it offers safety, liquidity and regular periodic income.
