Senior Citizens Savings Scheme

 

 WHAT IS SENIOR CITIZEN SAVINGS SCHEME (SCSS)? 

Post retirement, investors are always on a lookout for avenues to park their retirement corpus that is not only safe but also provides regular income to manage their day to day living expenses.

They are hesitant to put their hard-earned money in equities, which carries a higher risk of principal loss, or products which come with a long lock-in and do not offer any cash flow until maturity.

Introduced in 2004, SCSS offers capital protection, along with quarterly interest payments as a source of income. The scheme is backed by the Government of India and, therefore, offers a sovereign guarantee. Interest income from SCSS can also help retirees bridge the gap between their pension and the last drawn salary.

 

 

IMPORTANT THINGS TO KNOW ABOUT SENIOR CITIZEN SAVINGS SCHEME (SCSS)

The following are some of the important features of the SENIOR CITIZEN SAVINGS SCHEME (SCSS) that every investor must know.

1. Investor’s profile – Only retirees above 55 years old can invest in SCSS. It is most suited to senior citizens who need regular income in the form of fixed interest out of their retirement fund.

 

2. Risk – SCSS is a government scheme and considered to be the safest of all investments and involves zero risk of default and interest rate fluctuations.

 

3. Liquidity – SENIOR CITIZEN SAVINGS SCHEME (SCSS) is low on liquidity as it involves a lock-in of 5 years hence, accessing funds for meeting short term liquidity needs is not possible. However, in case of emergencies, it can be prematurely closed after completion of 1 year.

 

4. Taxation – Income received under this scheme is fully taxable where the interest received is added to the total taxable income and taxed as per the applicable tax slab. However, the amount invested is eligible for tax benefit under section 80C.

 

5. Volatility – SENIOR CITIZEN SAVINGS SCHEME (SCSS) involves zero volatility since the interest rate offered at the time of subscription remains fixed until maturity.

 

6. Time horizon – It is most suited to long term investors having an investment horizon of 5 years or more.

 

7. Regular Income – SENIOR CITIZEN SAVINGS SCHEME (SCSS) is known for providing regular income to retirees in the form of interest payout every quarter with zero risk.

 

8. Returns – SENIOR CITIZEN SAVINGS SCHEME (SCSS) offers fixed returns in the range of 8% to 9% in the form of interest which is 100% tax-free.

 

9. Asset class – SENIOR CITIZEN SAVINGS SCHEME (SCSS) is a pure debt product since the entire chunk of money accumulated is invested in debt instruments.

 

10. Cost – SENIOR CITIZEN SAVINGS SCHEME (SCSS) does not involve any cost of investment except penalties for closing the account prematurely.

 

11. Loan facility – Loan against SCSS is not available.

 

 

 WHO CAN INVEST IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)? 

As the name suggests, any individual aged 60 and above can invest in it. Early retirees between 55 and 60 years, who either opted for the voluntary retirement scheme (VRS) or superannuation, can also invest in the scheme, provided the investment is done within a month of receiving retirement benefits.

 

 

 WHO CANNOT INVEST IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)? 

Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not allowed to invest in SCSS.

Earlier, retired defense personnel were allowed to invest in this scheme irrespective of their age, subject to other conditions. However, on October 3, 2017, the government issued a notification stating that the investment age has been fixed at 50 years.

 

 

MINIMUM AND MAXIMUM INVESTMENT ALLOWED IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)

An individual, singly or jointly with a spouse, can open multiple SCSS account by investing any amount in multiples of Rs. 1,000/- up to a maximum of Rs. 15,00,000/- each. Deposit in this account can be made only once per account per financial year and also the amount invested in the scheme cannot exceed the money one receives on retirement. Therefore, one can invest either Rs. 15,00,000/- or the amount received as a retirement benefit, whichever is lower.

The account can be opened by cash for amounts below Rs. 1,00,000/- and by cheque only for the amount beyond that. The investment date in the scheme is taken as the date on which the cheque is realized in the government's account.

 

Limit on number of accounts

There is no limit on the number of accounts that can be opened, but the total amount in all the accounts must not breach the maximum investment limit. In the case of joint accounts, the primary account holder is deemed the investor while the second stakeholder must be the primary account holder’s spouse.

 

 

WHAT KIND OF RETURNS CAN SENIOR CITIZEN SAVINGS SCHEME (SCSS) GENERATE?

The income earned under this scheme is in the form of “Interest”.

The government of India updates the interest rate on its Senior Citizen Saving Scheme on an annual basis but the same is calculated and paid out every quarter. Interest on the money accumulated in the SENIOR CITIZEN SAVINGS SCHEME (SCSS) account is payable on 31st March/30th September/31st December in the first instance and thereafter interest is payable as of 31st March, 30th June, 30th September and 31st December of each year.

The interest rate on the SENIOR CITIZEN SAVINGS SCHEME (SCSS) is reset every quarter by the government. However, the interest payable on an investment is locked on the date of the investment and does not change even if the rate on the scheme as a whole is revised later.

Only new investment under SCSS is affected by the change in interest rate. Thus, this makes it an attractive investment in a falling rate scenario.

 However, if an SCSS account is extended post maturity, the interest rate that the extended account will earn will be as per the rate prevailing for that scheme on the date of extension.

The interest is calculated for each quarter up to the last day of every quarter i.e., on March 31, June 30, September 30 and December 31. The interest payable is credited to the account holder's account on April 1, July 1, October 1 and January 1.

The account holder, while investing in SCSS, must remember that if the investment is done via post office then he/she must have an operating post office savings account to receive the credit of the quarterly interest. The same goes for investment done through a bank.

As of now, the credit of the interest on the investment done through a post office is not possible in the account holder's bank savings account.

 

HISTORICAL DATA OF RETURNS IT HAS GENERATED SO FAR

 

 

FUND ACCESSIBILITY AND LOCK-IN APPLICABLE FOR SENIOR CITIZEN SAVINGS SCHEME (SCSS)

The tenure of the scheme is 5 years, which can be further extended for 3 more years. To extend the scheme for another 3 years after completion of 5-year tenure, the investor needs to submit the duly filled Form B which is regarding the extension of the scheme. Only one extension is allowed and such extended accounts can also be closed after one year of extension without any penalty.

 Premature closure is allowed, but only after one year and with premature withdrawal charges.

There is no provision for partial withdrawal. Investors can prematurely close the account after completing 1 year. If one prematurely closes after a year, but before two years from the start date, the charges are 1.5% of the deposit, and after 2 years it is 1%.

No charges are levied in case of premature closure of the account due to the depositor's death.

 

 

WHAT ARE THE BENEFITS OF INVESTING IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)?

The SENIOR CITIZEN SAVINGS SCHEME (SCSS) offers the following benefits to its investors.

1. Safety – It is the safest option with guaranteed returns and carries the minimum risk of principal loss.

 

2. Save Tax – SENIOR CITIZEN SAVINGS SCHEME (SCSS) will not only help you accumulate wealth for long term goals but also help you save tax under section 80C.

 

3. Protection from market volatility – Since SCSS is a debt instrument, it provides a fixed return on investment that keeps you protected from the market volatility.

 

4. Superior returns – Fixed returns of above 8% is a very good proposition as compared to FD or any other debt instrument.

 

5. Protection from interest rates volatility – Though interest rates in the case of SCSS reset every quarter, it has a bearing on a new account only that opens after that. All the existing accounts continue to enjoy the same rate that was offered to them at the time of signing up. This helps its subscribers and protects them in case of a falling rate scenario.

 

6. Create cash flow every quarter – Interest is paid every quarter so it can be a very good source of generating regular income.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)?

The SENIOR CITIZEN SAVINGS SCHEME (SCSS) has the following limitations.

1. No Equity participation – Despite being invested for 5 years, it loses its investment value due to no participation in equity. ELSS funds on the other hand can generate much better returns given the time frame with comparatively much fewer restrictions.

 

2. Unable to beat inflation – Due to the absence of equity participation, it may or may not be able to generate inflation-adjusted returns.

 

3. Low liquidity – SENIOR CITIZEN SAVINGS SCHEME (SCSS) can only be liquidated after 5 years on maturity. And in case someone needs to liquidate it before maturity, they need to close the entire account prematurely with the penalty as there is no provision of partial withdrawal. Hence, anyone looking forward to liquidating their investment before maturity should consider investing in debt mutual funds or liquid funds.

 

4. Poor returns during rising rate scenario – Interest rates that prevail at the time of opening the account becomes fixed for the rest of the tenure. Hence, any upward or downward movement in the market rates has no impact on the rates of existing subscribers. This feature can make SCSS look less attractive to its investors during the rising rate scenario.

 

5. Tax inefficient – The entire interest earned is added to the total income and taxed as per the applicable tax slab. This feature makes this investment highly unattractive in case the investor falls in the higher tax slab of 20% or more.

 

 

WHO SHOULD CONSIDER INVESTING IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)?

SENIOR CITIZEN SAVINGS SCHEME (SCSS) is most suited to the following investors:

1. Conservative Investor - It is best suited to individuals having surplus funds, who want to park it somewhere where they can earn guaranteed returns irrespective of market fluctuations with zero risk of default and wants to earn more than what they get in a savings account.

 

2. Senior Citizens - Individuals above 60 years of age who are not willing to take any risk of market fluctuations.

 

3. Investors looking for regular income – Investors post-retirement need fixed income consistently to manage their living expenses. Since this scheme offers interest payout every quarter with zero risk, it is a haven and most suited option for retirees.

 

 

WHO SHOULD AVOID INVESTING IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)?

SENIOR CITIZEN SAVINGS SCHEME (SCSS) may not be the best investment for the following investors:

1. Moderate risk-takers – Some investors have an appetite to take moderate risk even after retirement. Such investors can park their money partially in market-linked products like balanced mutual funds or bonds etc.

 

2. Investors in higher tax slab – Investors who fall under a higher tax slab of 20% or above as the entire interest earned is added to their taxable income and taxed accordingly.

 

3. Investors with short term liquidity needs – SCSS has a lock-in period of 5 years. Hence, anyone looking forward to liquidating their investment before maturity may not be able to do so without penalty.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)

SENIOR CITIZEN SAVINGS SCHEME (SCSS) investors must follow the below suggestions while investing to maximize the value of their investment.

1. Update nomination details – Updating nominee details with the respective bank or post office is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

2. Should consider diversifying – Returns from SCSS are fixed, not linked to the market and may or may not be able to beat inflation. Hence, instead of investing all your money in this product, you can also consider diversifying your investment in market-linked products like balanced mutual funds or bonds issued by the Government of India.

 

2. Understand the product and the risk involved – Investors should be aware of all pros and cons of the investment they are getting into. The amount required on maturity, liquidity needs, risk appetite, etc. should be carefully assessed before signing up for this scheme.

 

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)

SENIOR CITIZEN SAVINGS SCHEME (SCSS) investors must avoid indulging in following practices while investing to protect their investment from losing its value.

1. Breaking it prematurely – Avoid breaking the deposit prematurely as it may lead to a penalty.

 

2. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN SENIOR CITIZEN SAVINGS SCHEME (SCSS)?

SENIOR CITIZEN SAVINGS SCHEME (SCSS) investors should be mindful of following risks involved in this investment:

1. Returns may or may not be good enough to beat inflation – Though SCSS ensures the highest level of safety of principal and give assured returns, it may or may not be good enough to beat inflation year on year since it is not market-linked. The average rate of inflation is around 6% - 8% per annum whereas post-tax returns generated from SCSS can go below 7% or even lesser. This may lead to shortfall when you look at the corpus you created in meeting your financial goals.

To reduce the risk, you can consider investing partially in through SIP.

 

2. Liquidity Risk – SCSS can only be liquidated after 5 years of maturity. And in case someone needs to liquidate it before maturity, they need to close the entire account prematurely with a penalty as there is no provision of partial withdrawal. Hence, anyone looking forward to liquidating their investment before maturity should consider investing in debt mutual funds or liquid funds.

 

 

TAXATION RULES FOR SENIOR CITIZEN SAVINGS SCHEME (SCSS)

Investment in SENIOR CITIZEN SAVINGS SCHEME (SCSS) qualifies for deduction under Section 80C of the Income-tax (I-T) Act up to Rs. 1,50,000/- per annum.

Section 80C benefit under this scheme is available in the financial year in which the deposit is made. As per SCSS rules, only one deposit is allowed in one SCSS account. There will be no additional benefit under Section 80C for the extension of an existing account after five years.

A person loses the 80C benefit if he withdraws from the scheme prematurely where the principal amount withdrawn, along with the interest paid in the year of the withdrawal is added to the individual's gross total income in the year of the premature withdrawal.

It must be noted that the principal amount on premature withdrawal by the nominee or legal heirs is not taxable in their hands in the event of the death of the depositor. Any interest paid into the account of a depositor after the date of his demise will be taxable in the hands of the nominee or legal heirs.

The interest received under the scheme is taxable in the hands of the depositors as per the applicable tax slab. There is a tax deducted at source (TDS) on the interest payment if the amount is more than Rs 10,000 per annum as per current tax laws.

 

 

DOES ANY OTHER PRODUCT OFFER BETTER PROSPECTS THAN SENIOR CITIZEN SAVINGS SCHEME (SCSS)?

A SENIOR CITIZEN SAVINGS SCHEME (SCSS) can be beaten by the following products on various grounds.

1. From a safety point of view – SCSS is supreme and is considered to be the safest of all other debt-oriented instruments as the returns it generates are fixed and there is no risk of principal loss as well since it is backed by the government.

 

2. From the returns point of view – Balanced funds generate better returns than SCSS as they also participate in the equity market.

Equity mutual funds, on the other hand, generate even better returns in the long run however, it carries a higher risk of principal loss as they invest directly in the stocks of various companies.

If someone has an even higher risk appetite is looking for even better returns then they can invest in stocks or IPOs of various companies.

 

3. From a liquidity point of view – SENIOR CITIZEN SAVINGS SCHEME (SCSS) comes with a pre-defined maturity period and breaking it prematurely attracts a penalty. Hence, someone who is expecting any major expense soon can consider investing in liquid funds or ultra short term funds which not only generates decent post-tax returns but also offer higher liquidity.

 

 

HOW TO INVEST AND DOCUMENTS NEEDED

Currently, SCSS deposits can be opened in any designated post offices or in any authorized banks as follows.

1. Allahabad Bank
2. Andhra bank
3. State Bank of India
4. State Bank of Mysore
5. State Bank of Bikaner and Jaipur
6. State Bank of Patiala
7. State Bank of Travancore
8. State Bank of Hyderabad
9. Bank of Maharashtra
10. Bank of Baroda
11. Bank of India
12. Corporation Bank
13. Canara Bank
14. Central Bank of India
15. Dena Bank
16. Syndicate Bank
17. UCO Bank
18. Union Bank of India
19. Vijaya Bank
20. IDBI Bank
21. Indian Bank
22. Indian Overseas Bank
23. Punjab National Bank
24. United Bank of India
25. Private Sector Bank- ICICI Bank Ltd.

 

Documents required

Following is the list of the documents required for investing in the scheme –

(a) Duly filled application form, available at the post office or bank

(b) Know Your Customer (KYC) form

(c) Photographs of the applicant/s

(d) Permanent Account Number (PAN)

(e) Aadhaar

(f) Address proof

(g) Age proof

(h) In the case of retirees, a certificate from the employer, stating the retirement was on superannuation or otherwise, retirement benefits, employment held (designation) and the period of employment.

(i) Proof of date of disbursal of the retirement benefits.