Whether a person is employed or approaching the retirement age, everyone searches for investment avenues which are safe and can offer regular income. Although one can find various schemes of investment but security of money is most important factor.
In 2004 Government of India introduced one such special scheme known as Senior Citizen Savings Scheme or SCSS to cater the financial needs of senior citizens.
However the scheme had become very popular amongst the people, but last year when banks offered high rates on fixed deposits had overshadowed the scheme. But in the past few months the banks are reducing deposit rates due to which senior citizen can go for this scheme.
The only shortfall of the scheme is the interest earned on it is taxable. In case the interest income in a year exceeds Rs 10,000, then the TDS (tax deducted at source) is cut.
Although in the recent amendment the investment of up to Rs 1,00,000 in a year done under this scheme has been exempted under Section 80C of the Income Tax Act.
Here the advantages and disadvantages of the scheme have been discussed to help the senior citizens to compare it with other options available.
Senior citizen, a person who has completed 60 years or above is eligible for the SCSS but there is a provision that a person who has completed 55 years and opted for voluntary or any special retirement scheme, can avail this scheme subject to certain conditions.
The scheme is basically for senior citizens therefore it has some special features.
1. The scheme offers a fixed rate of return at 9% per annum, which is higher than the returns offered on other fixed income instruments like PPF and NSC.
2. The investor gets interest income quarterly. Generally, it is the last working day of every quarter. There is no option of getting interest income yearly or cumulative interest at the time of maturity.
3. The tenure of the scheme is 5 years, but premature withdrawal after a year is permissible which gives the benefit of better liquidity to meet unforeseen expenses. Premature withdrawal involves some cost. In case the deposit account is closed after the first yea, but before the second year, 1.5% of the principal amount is deducted otherwise 1% of the principal amount is charged once the scheme completes two years.
4. One gets the option of extending the scheme for another three years on maturity at the prevailing interest rate at that time.
5. The minimum amount of investment is Rs 1,000 while the maximum investment can be Rs 15 lakh. The investment has to be made in multiples of Rs 1000.
6. One also gets the option of opening more than one account, but the new account can be opened after a one month gap. The account can be opened in an individual’s name or can be opened jointly with spouse. Joint account with any other family member or relative is not allowed. Although one can open more than one account but there is the cumulative investment limit has been set to Rs 15 lakh.
There is one perception among the people that it can be opened only with post office but it is not so. Few of the designated branches of nationalized banks and the ICICI bank are authorized to receive deposits under the scheme.
Looking at the above points the scheme looks fruitful but is it really worth investing in this scheme. To get the answer we need to compare this scheme with other investment avenues having similar features.
A bank fixed deposit features are some what same. At present banks are offering interest rates in the range of 7-7.5%. But the nationalized banks and some of the private banks offer additional interest benefit to senior citizens in the form of 25-50 basis points higher. Therefore the interest rate offered on fixed deposit can range of 7.25-8%, but this is less than 9% offered on SCSS. Thus the SCSS is a bit more profitable than bank fixed deposits.
Let us compare SCSS with MIS (Monthly Income Scheme) offered by post offices in India, having same features. Under MIS the fixed rate of return is 8%.
The interest in MIS is paid monthly and the tenure is six years. In this comparison we consider the returns under SCSS over six years.
For instance Mr A deposits Rs 1,00,000 under SCSS, while Mr B invests 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 the principal amount will be Rs 1,00,000 which he will get back on maturity. Thus the total interest payout over 6 years will be around Rs 54,000.
While Mr B will get around Rs 660 every month, which comes to Rs 2,000 every quarter till the end of sixth year, which stands to be Rs 250 less than the quarterly receipts under SCSS. But under MIS a bonus of 5% on principal amount is paid at the time of maturity. Therefore Mr B will be receiving Rs 1,00,000 along with Rs 5,000 as bonus at the end of sixth year.
Thus the total profit Mr B earns over six years amounts to Rs 53,000. However in terms of total profit earned under MIS or under SCSS over the tenure, there is not much difference. But in case once money requirement increases periodically then the SCSS is a better option as the investor gets more money in the hand every quarter.
Looking at the above points and comparison one reaches to a conclusion that senior citizens must invest a portion of their retirement corpus in the Senior Citizen Savings Scheme as they will get everything – safety, liquidity and regular periodic income under this scheme.