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What is a senior citizen saving scheme and how it works?

senior citizen saving scheme
senior citizen saving scheme

Senior Citizens Savings Scheme SCSS is a post office savings scheme for senior citizens that offers safety and regular income to its investors. It is also a tax saving plan. It suits retired investors looking for a low risk investment option. The investment in SCSS is eligible for tax exemption under Section 80C. However, interest is subject to tax as per individual tax slab.

Who Should Invest in a Senior Citizens Savings Scheme?

Only resident Indians can invest in SCSS. Senior Citizens Savings Scheme suits investors who are retired and are also looking to save tax under Section 80 C. Government backs the SCSS scheme and hence falls under low risk investments. The scheme guarantees return. Since risk in SCSS is comparatively low, investors who understand and can absorb this can invest in it. Investors who prefer stable returns and regular income can also invest in the Senior Citizens Savings Scheme. However, to invest in this scheme, one has to be eligible. Below is the eligibility criteria of SCSS.

Eligibility for SCSS

The Senior Citizens Savings Scheme is open to all resident Indians. However, there are additional criteria that investors have to meet.

  • Residents aged 60 and above only can invest in this scheme.
  • Individuals aged 55 but below 60 can also invest in this scheme. However, they should have been retired according to the VRS and superannuation rules. Also, they will have to open the SCSS account within one month from the date of receipt of retirement benefits.
  • Retired defense personnel can also apply to this scheme irrespective of the above age limit. However, they have other sets of terms and conditions to fulfill.
  • Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) are not eligible to invest in the Senior Citizens Savings Scheme.
  • Also, Hindu Undivided Family (HUF) members are not eligible to invest in the Senior Citizens Savings Scheme under these rules.

Minimum and Maximum Amount

The minimum deposit amount for the Senior Citizens Savings Scheme is INR 1,000. Also, the maximum amount is INR 15,00,000. Therefore, eligible investors can only invest in the range prescribed. The amount invested in the account cannot exceed the money received on retirement.

The minimum and maximum amount cap are for both single and joint accounts. Also, one can open a joint account only with their spouse.

Additionally, if an individual holds multiple SCSS accounts, then the total investment value of all the accounts cannot exceed the maximum limit of INR 15,00,000. 

For investments below INR, 1,00,000 cash transactions are permitted; however, for investments exceeding INR 1,00,000, a cheque or DD is mandatory. 

Features of the Senior Citizens Savings Scheme

Following are the features of the Senior Citizens Savings Scheme:

Regular income: The scheme guarantees regular income in the form of interest payments. Interest is calculated every quarter. The same is credited every quarter in the investor’s account. The interest payment is made on April 1st, July 1st, October 1st, and January 1st every financial year. 

Interest rate: The current interest rate for the quarter of April – June (2020-2021) is 7.4%. The interest rate is reviewed every quarter. And it is subject to periodic change by the Ministry of Finance. 

Taxation: The investment in SCSS is eligible for tax exemption under Section 80C. However, interest earned is taxable. TDS is deducted on interest if it is more than INR 50,000.

Tenure: SCSS matures in 5 years. The lock in period for this scheme is five years. However, one can extend their investment in the scheme for another three years. 

Maximum and minimum investment: The minimum investment in the Senior Citizens Savings Scheme is INR 1,000. Investors can invest in multiples of 1,000. The maximum investment is INR 15 lakhs.

Premature withdrawal: SCSS allows premature closure. However, it is allowed after one year with a penalty of 1.5% on the deposit. After two years, investors can withdraw with a penalty of 1% on the deposit. 

Interest Rate on Senior Citizens Savings Scheme

The interest on the Senior Citizens Savings Scheme is 7.4%. This is the rate for the current quarter (April 2020 – June 2020). 

SCSS interest rates are reviewed every quarter. And the interest payment is made every quarter. 

The interest is taxable at the individual income tax slab rate. If the interest exceeds INR 50,000 TDS is deducted. The past SCSS interest rates are:

PeriodInterest Rate
Up to 20129%
2012-139.30%
2013-149.20%
2014-159.20%
2015-169.30%
2016-178.50%
2017-18 (Q1)8.40%
2017-18 (Q2)8.30%
2017-18 (Q3)8.30%
2017-18 (Q4)8.30%
2018-19 (Q1)8.30%
2018-19 (Q2)8.30%
2018-19 (Q3)8.70%
2018-19 (Q4)8.70%
2019-2020 (Q1)8.70%
2019-2020 (Q2)8.60%
2019-2020 (Q3)8.60%
2019-2020 (Q4)8.60%
2020-2021 (Q1)7.40%

Tenure and Premature Withdrawal of Fund

SCSS has a tenure of five years. However, one can extend their investment in the scheme for another three years. Also, the interest rate for the extended tenure would be at the prevailing rate. 

For the extension of the scheme tenure, the investor has to submit a form. Form B needs to be filled by the investors and submitted at the branch. Also, the extension of the scheme tenure is allowed only once. 

SCSS accounts allow premature withdrawals; however, these come with penalties. The penalty varies based on the tenure of the account. Upon completing one year of account opening, the investor can prematurely withdraw the investment. Following are the penalties for premature withdrawals:

  • For all investments withdrawn before completion of two years, 1.5% of the investment/deposited amount will be charged as penalty.
  • If withdrawn after 2 years of account opening, a penalty of 1% on the deposited amount is charged. Also, for extended tenure accounts, there is no penalty charge after the first year.

In the event of the death of the investor (before account maturity), the account will be closed. The nominee or the legal heir will receive all the proceeds. For this, the legal heir or nominee has to fill out a form and submit it along with the death certificate.

Tax on SCSS

SCSS is one of the most secure investment options for senior citizens. As the Government backs the scheme, the security it offers is very good. Also, it offers good returns and provides tax benefits too. The amount invested in the SCSS account is eligible for a tax deduction. One can claim a maximum of up to INR 1,50,000 under Section 80C of the Income Tax Act. The investor can submit the investment proof to claim a deduction while filing income tax returns.

However, tax exemptions are applicable only under the existing tax regime. In case the investor chooses to follow the new tax regime announced in the Union Budget 2020. The tax deduction isn’t available.

The interest earned on the SCSS account is subject to tax as per the applicable income tax slab rate of the investor. If the interest income exceeds INR 50,000 in a year, then the interest is subject to TDS.

Authorized Banks for SCSS

Senior Citizens Savings Scheme is a government back post office savings scheme. One can open an SCSS account in any post office. However, few authorized banks also accept investments for SCSS and help open an SCSS account. The following is the list of authorized banks.

  1. Allahabad Bank
  2. Andhra bank
  3. Bank of Maharashtra
  4. Corporation Bank
  5. Bank of Baroda
  6. Bank of India
  7. Canara Bank
  8. Central Bank of India
  9. Dena Bank
  10. IDBI Bank
  11. Indian Bank
  12. Indian Overseas Bank
  13. Punjab National Bank
  14. State Bank of India
  15. Syndicate Bank
  16. UCO Bank
  17. Union Bank of India
  18. Vijaya Bank
  19. ICICI Bank 

How to Open an SCSS Account?

One can open an SCSS account at any post office or private or public banks in India. To open the account at any of the venues is more or less the same. The procedure is as follows:

  1. Visit the nearest public or private bank branch or post office branch.
  2. Fill the SCSS Form A
  3. Carry original identify and address proof for verification, and submit the photocopies of them 
  4. Submit age proof (voter ID, passport, birth certificate or senior citizen card)
The SCSS application form requires some key information while opening the account:
  • Name as per PAN Card
  • Name of applicant’s mother/father/spouse
  • For a joint SCSS account, the spouse’s name, age, and address has to be provided
  • Cheque or demand draft for the desired investment amount
  • Nominee name, address, and age (in case more than one nominee, all the details of the other nominees have to be provided)
Following are the documents required while opening an SCSS account:
  • Aadhar Card
  • PAN Card
  • Voter ID
  • Passport
  • Electricity Bill
  • Telephone Bill
  • Senior Citizen Card/ Birth Certificate
  • Two passport-sized photographs

Self-attested photocopies of all the documents mentioned above are required to be submitted at the account opening branch.

Long Term Government Backed Investment Options

Government Securities

Government securities are risk free investments. Retail investors can invest in government securities on the E-Gsec platform. The E-Gsec platform is a collaboration between NSE and RBI. This helps the retail investors invest in Treasury Bills (T-Bills) and Government of India Dated Securities (G-Sec). These risk free instruments are perfect for portfolio diversification. Government Securities are long-duration investments. The interest payments are twice a year.

Using either the NSE platform or NSE goBID mobile app or website retails, investors can place their bids. The minimum bidding amount is INR 10,000, and after that in multiples of INR 10,000. Premature withdrawals result in capital gains or loss. However, investments held until maturity are safe.  

Tax-free bonds

Tax-free bonds are bonds that are issued by Government-backed institutions. For example, some of the tax-free bonds in India are issued by Power Finance Corporation Ltd. (PFC), Indian Railway Finance Corporation Ltd (IRFC), National Highways Authority of India (NHAI), NTPC Ltd, Indian Renewable Energy Development Agency, Rural Electrification Corporation Ltd (REC), and Housing and Urban Development Corporation Ltd (HUDCO). Most bonds issued by these companies have the highest safety ratings. In case there isn’t any new issue by these authorities, an investor can always buy and sell them on the stock exchange. These bonds are listed securities on the stock exchange.

Tax-free bonds are usually long term investments. The tenure of these bonds is around 10,15, and 20 years. Also, the liquidity of these bonds is very low. Therefore, investors with long term investment horizons only should invest in them. Additionally, the interest on these bonds is tax-free and is not subject to any TDS.

Furthermore, there are annual interest payouts. Hence, they might not suit investors or retired individuals looking for regular monthly income. The current Yield to Maturity (YTM) for tax-free bonds is around 5.5%.

Atal Pension Yojna (APY)

APY is a Government of India initiative for the unorganized sector to include them under the social security scheme. Under this pension scheme, the subscribers would receive fixed amounts of pensions of INR 1,000, INR 2,000, INR 3,000, INR 4,000, and INR 5,000 per month at the age of 60 years based on the contributions they made. Investors can start investing in the scheme at the age of 18, and the maximum age to join is 40 years. They can contribute only up to the age of 40.

The contribution levels will be low if the person joins early and increases if he/she joins late. All bank account holders are eligible to contribute to this scheme. However, the main focus is on the unorganized sector workers. The subscription amount is decided based on the fixed pension amount the person chooses.

If an investor discontinues paying, after six months, the account will be frozen. After 12 months, the account will be deactivated, and after 24 months, the account will be closed. The contribution towards the APY scheme is eligible for tax benefits up to INR 1.5 lakhs under section 80CCD (1) and an additional INR 50,000 under Section 80CCD(1B). Therefore, though the scheme was launched for the unorganized sector, anyone can invest in this and generate income during retirement. Hence, investors looking for additional retirement income can invest in APY.

Public Provident Fund (PPF)

The Public Provident Fund was launched by the National Savings Institute and is one of the post office savings schemes. PPF is one of the popular government investment instruments. 

The lock-in period is 15 years for a PPF. One can extend their investment in PPF for another five years.

PPF contributions are eligible for a tax deduction. Investments up to INR 1,50,000 can be claimed for tax deduction under Section 80C of the Income Tax Act. Most importantly, returns from PPF are completely tax exempted as well. The minimum investment into a PPF account is INR 500, and the maximum investment is INR 1,50,000.

Investors cannot open multiple accounts. The interest is compounded annually. Public Provident Fund investments can be payable in the form of a lump sum or up to 12 deposits per financial year. PPF is easily transferable from one post office or bank to the other.  

Any Indian citizen can avail the benefits of this savings plan. However, NRIs and HUFs are not eligible to open a PPF account. Additionally, investors can avail a loan against PPF investments. The loan can be availed between the third and fifth year.

As PPF has a lock-in period of 15 years, their benefit can be reaped during retirement. Hence, investing early in PPF will help in a stress-free retirement.

Post Office Monthly Income Scheme (POMIS)

Post Office Monthly Income Scheme (POMIS) is a government-backed savings scheme. It gives its investors monthly returns in the form of interest payments. The post office monthly income scheme interest rate is 6.6% for the current quarter (April 2020-June 2020). The scheme interest rates are reviewed every quarter. It has a lock-in period of 5 years. 

It is a low risk investment option as the returns are guaranteed. A POMIS account can be opened in any post office. There is no restriction on the number of accounts that can be opened. However, the cumulative balance across all accounts shouldn’t be more than INR 4.5 lakhs. For joint account holders, the limit is INR 9 lakhs. An Indian citizen above the age of 10 can open a POMIS account. The account is transferable from one post office to another. Premature withdrawal is allowed after one year of opening the account with a penalty. Upon maturity, the investors can wish to reinvest in the scheme if they want to. No TDS is deducted on the interest amount. However, interest earned on the post office MIS scheme is taxable. The investment doesn’t qualify for tax savings under section 80C.

Kisan Vikas Patra (KVP)

Kisan Vikas Patra is a small savings scheme. It is a government of India initiative to encourage savings. The investment amount doubles in 10 years and four mounts (124 months). All Indian citizens above the age of 18 can open a KVP account. Initially, the scheme was open only to farmers. However, it is now available to everyone. A KVP account can be opened in any post office. The minimum investment is INR 1,000. The current interest rate for this scheme is 6.9%, and it is revised every quarter. The KVP scheme has a lock-in period of 2.5 years (30 months). Investors can redeem the investment at intervals of six months once the lock-in period is over. KVP savings plan is not eligible for Section 80C deductions of the Income Tax Act. Therefore, investments and returns are taxable.

Additionally, a KVP investment certificate can be used as loan collateral. For investments above INR 50,000 and INR 1,00,000, PAN and income proof is necessary, respectively. The KVP savings plan is a low risk savings option that provides guaranteed returns and is a safe investment option.

Post Office Time Deposit Account (TD)

Post Office Time Deposit scheme or Post Office Fixed Deposit (POFD) is a Government-backed post office scheme. The product aims to encourage savings for future goals. A POFD is similar to a bank deposit. The return is in the form of interest, which is guaranteed. Post office FD has four tenures – 1, 2, 3, and 5 years. The tenures have different interest rates (FD rates). 

Higher the investment tenure, higher is the Post Office FD interest rate. The interest is payable annually but calculated quarterly. One can open only one fixed deposit per account. However, post offices allow multiple accounts per person. One can also open a post office FD in all public and private sector banks. The investor has to invest a minimum of INR 200 and after that in multiples of INR 200. Premature withdrawal of POFD is allowed after six months at a penalty of 1%. Upon maturity, the POFD can be withdrawn or renewed for the same time period.

The interest rates offered by POFDs are sometimes higher than Bank FDs. An investor can take a loan against a POFD. Post Office FD best suits highly conservative investors investing a lump sum amount. A Post Office FD calculator can be used to calculate the wealth gained from investment in POFD. One can use Scripbox’s Post Office Fixed Deposit Calculator, which is available online.

National Savings Certificate (NSC)

National Savings Certificate is a government-backed fixed income scheme. One can open an NSC account at any post office. The scheme guarantees return in the form of interest. The current interest rate of 6.8%, as announced by the Ministry of Finance on April 1st, 2020. The interest earned is reinvested back into the scheme. NSC investments and reinvested interest up to INR 1.5 lakhs are tax exempted under Section 80C of the Income Tax Act. NSC schemes come with a lock in period of 5 years. The minimum deposit is INR 100, and there is no maximum limit for investment in NSC.

There is no tax deduction at source for NSC investments. Investors have to pay a tax on the maturity amount as per their tax slab.  NSC scheme doesn’t accept any premature withdrawals. However, one can use the NSC certificate as loan collateral. Upon the death of an individual, the nominee can withdraw the money prematurely. Upon the NSC scheme’s maturity, the investor can encash the investment or transfer to a bank account. 

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a retirement and pension scheme for senior citizens. Life Insurance Corporation (LIC) manages and operates the scheme under the purview of the Government. It was launched in May 2017. The scheme guarantees returns as the Government of India backs it. PMVVY provides its subscribers an assured return of 8-8.3% for ten years. The scheme pays out a regular pension with a monthly, quarterly, or yearly frequency.

Subscribers of this scheme should be of age 60 and above. PMVVY policy term is ten years, and there is no maximum age of entry. The minimum purchase price is INR 1.5 lakhs, which guarantees a monthly pension of INR 1,000. The maximum purchase price is INR 15 lakhs, which guarantees a monthly pension of INR 10,000. The entire amount, including the final pension and purchase price, will be paid out at the end of 10 years.

Subscribers can take a loan up to 75% on the purchase price after three years. For any medical emergencies of the subscriber and the spouse, 98% of the amount can be withdrawn. In case of death of the subscriber, the nominee receives the entire amount. Investment in PMVVY is not eligible for tax deduction under Section 80C of the Income Tax Act. The returns from the scheme are taxable at the individual tax slab.

Sukanya Samriddhi Yojana (SSY)

Sukanya Samriddhi Yojana is a government savings scheme. The main motive behind the scheme is to secure a girl child’s future. The scheme allows the parents of the girl child to invest in her future. Parents can open only one account for a girl child. Also, parents can open only two accounts for a family. And in the case of twins or triplets, a third account can be opened. The SSY account has a lock-in period of 21 years.

To open the account, the girl must be ten years of age or younger. The minimum amount of investment is INR 250, and the maximum is INR 1,50,000. The added advantage is the guaranteed returns and EEE status of investment, interest, and maturity amount.  To keep the account active, the investor has to invest a minimum of INR 250 every year for 15 years.

When the girl child reaches 18, up to 50%, the amount can be withdrawn. Also, one should use the withdrawn amount for higher education purposes only. The returns are credited into the account yearly. And can be withdrawn when the girl reaches the age of 21 or gets married, whichever is earlier. Furthermore, the SSY account doesn’t earn interest after the maturity of the scheme. 

The current interest rate for the SSY account is 7.6%. Also, the interest gets compounded annually. The scheme guarantees returns as the Government backs it.

Furthermore, SSY doesn’t suit monthly income generation or retirement purposes. SSY is primarily to secure a girl child’s future.

Other Long Term Investment Options

Though the below-mentioned investment options are not government-backed investments, they are however suitable alternatives for retirement income.

Bank Fixed Deposit

A fixed deposit scheme is a traditional long term savings instrument. FDs are one of the safest investment options. It is also a low risk investment option. Investing in tax savings, FDs are eligible for tax exemption under Section 80C of the Income Tax Act. Tax saving FDs come with a lock in of 5 years. However, FDs have different tenures. Bank FDs offer high-interest rates (FD rates) when compared to a saving account. The FD interest rate for senior citizens is higher than regular citizens. FD interest payments are monthly or quarterly.

One can open an FD in any bank in India. Only resident individuals, HUFs, NRIs, firms, charitable trusts are eligible to open FDs in India. Investors can invest a lump sum amount in FD at the time of opening the FD. One cannot invest any additional amount. Banks don’t allow premature closure of FDs. In case of emergencies, one can liquidate it at a lower interest rate. However, one can also take a loan against FD and get up to 90% of the FD amount.

Loans such as loan against property, business loan, education loan, etc., can be taken against FD. The interest is taxable in the hands of the investor at the slab rate. And the interest payments is subject to TDS. Upon maturity, one can reinvest in a new FD. One can use the Scripbox FD calculator to calculate the total corpus upon maturity. The fixed deposit calculator is available online and is free to use. 

Scripbox provides an online loan EMI calculator that helps in determining the loan EMI amount. One can use the Scripbox’s loan EMI calculator to calculate car loan, home loan, and personal loan EMI.

Immediate Annuities

Annuities offer regular income to retired investors for a lifetime. IRDAI, a government body, regulates annuities. One has to invest a lump sum amount in the scheme, and the pension payments start right away. The pension payment depends on the lumpsum investment made. 

The investor can choose the payment interval (monthly, quarterly, or annually). There are multiple annuity options for investors to choose from. Until the death of the investor, he/she will receive the pension amount. Upon death, the nominee receives the entire amount. The annuity amount can depend on multiple factors. Such as the lumpsum amount paid, age of the investor, the tenure of payment, and the prevailing interest rates. The annuity payments are entirely taxable in the hands of the investors as per their tax slab. 

Comparison of Investment Options with SCSS

Senior Citizens Savings Scheme is a safe investment option available for retirement purposes. SCSS offers safety and regular income for its investors. Also, SCSS has the shortest lock in of 5 years compared to most other government schemes. Additionally, it is an excellent tax saving plan.

Therefore in this section, we are comparing SCSS to other saving schemes suitable for retirement, generating guaranteed returns, and offering tax benefits.
Features/SchemeSenior Citizens Savings SchemeAtal Pension YojanaNational Savings CertificatePost Office Time Deposit AccountBank FDPost Office Monthly Income Scheme (MIS)PMVVYAnnuities
Investment ObjectiveRetirement IncomeRetirement IncomeSmall SavingsMonthly IncomeSavingMonthly IncomeRegular IncomeRegular Income
Minimum InvestmentINR 1,000NA, the monthly contribution is calculated based on pension selectedINR 100INR 100Varies from Bank to BankINR 1,500INR 1,50,000Depends on the scheme
Maximum InvestmentINR 15,00,000NA, the monthly contribution is calculated based on pension selectedNo LimitINR 4,50,000No LimitINR 4,50,000INR 15,00,000Depends on the scheme
Lock-In Period5 Years20 years5 YearsFive Years5 Years5 YearsTen yearsDepends on the scheme
Interest Rate7.40%Returns depend on contributions6.80%Depends on the tenureDepends on the tenure6.60%8-8.3%Depends on the contribution
Tax ExemptionInvestment: Tax Exempted Returns: Taxable at per IT slab rateInvestment: Tax Exempted Returns: Tax-FreeTax on investment: No tax Returns: Taxable at per IT slab rateInvestment: No Tax Exemption Returns: Taxable at per IT slab rateInvestment: Tax Exempted Returns: Taxable at per IT slab rateThe investment doesn’t qualify for tax exemption. Returns: TaxableInvestment: No Tax Exemption Returns: Taxable at per IT slab rateInvestment: No Tax Exemption Returns: Taxable

One can use the Scripbox Income Tax Calculator to determine their tax liability. The Income Tax Calculator also suggests tax-saving investments if there is a scope for saving more tax. This will help in filing income tax returns.

Conclusion

The Senior Citizens Savings Scheme SCSS is a scheme for senior citizens. It is a long term investment option that offers regular income to its investors. 

It is an ideal investment option as it guarantees income and is a low risk investment option. However, other investment options serve the purpose of long term investment and fulfill retirement goals. 

Also, Debt funds are an alternative investment option for senior citizens looking for fulfilling retirement goals. Though debt funds do not guarantee returns, they have the potential to earn higher returns when compared to other retirement investment options. Also, the returns from debt funds are predictable. This is because they invest in debt instruments like government and high-quality corporate securities.

Additionally, debt mutual funds do not have any lock-in period. However, the gains are taxable. For investments held for less than three years, the returns are subject to Short Term Capital Gains. The gains are taxable at the investor’s applicable Income Tax slab rate. While for investment held for more than three years, the returns are subject to Long Term Capital Gains Tax at 20% with indexation benefit. 

Published on July 16, 2020