Why Senior Citizens Should Not Invest In SCSS Despite 3-Year High-Interest Rate of 8.2%?

Amar Ranu, Sr. VP and Head – Investment Products and Insights, Anand Rathi Shares and Stock Brokers

SCSS attracts TDS on its interest income if it exceeds Rs. 50,000 in a year. Additionally, there is no flexibility in investment tenure – the maximum SCSS can be invested for is five years. Also, the maximum investment limit is Rs. 30 lakhs which may not be sufficient for those looking to invest a larger sum for their retirement. Since it is a debt instrument, there is no protection against inflation as the return is fixed.

Aashika Jain, financial expert and editor, Forbes Advisor

The Senior Citizens Savings Scheme (SCSS) is a scheme aimed to cater to the post-retirement needs of individuals who have attained the age of 60 years or above. There are four main reasons why citizens should not invest in SCSS.

The lock-in period of five years for an account that has to be opened at the age of 60 is a long tenure for a senior citizen who may need liquidity to attend to emergency requirements.

Another factor is the interest deduction that the account holder is subjected to when the account is closed prematurely. For instance, if the account is prematurely closed before completing one year of opening, the account holder gets the principal amount and earns no interest.

If the account is prematurely closed after the completion of one year of investment but before two years, deduction of an amount equal to 1.5% of the deposit is deducted. If the account closure is done on or after two years attracts a 1% penalty on the deposit.

The third factor is tax deducted at source (TDS) applicable on interest above INR 50,000. This is a big disadvantage when compared to other savings schemes such as the public provident fund where the interest is non-taxable.

The fourth and the most significant is that the interest payable every quarter, if left unclaimed by an account holder, does not not earn additional interest. For a senior citizen, tracking interest every quarter can be challenging and may end up eroding the possibility of earning deserved interest.

Mayank Bhatnagar, Chief operating Officer, FinEdge

In our view, SCSS is an attempt to oversimplify the problem of post retirement income generation, while the solution should ideally be customized to the retirees unique situation.

Instead of opting for an SCSS which is tax inefficient and illiquid (both problematic for a retired person), one should ideally work with a qualified advisor and set up an SWP (Systematic Withdrawal Plan) oriented action plan that combines equity-oriented funds with conservative funds such as Target Maturity Funds, Arbitrage Funds and Fixed Maturity Plans.

The degree of aggressiveness would depend on several factors; such as other sources of post-retirement income, overall size of the accumulated corpus, and the estimated duration of the post-retirement drawings phase. Customisation is critical in order to ensure that the retirees funds are optimally utilized, while ensuring easy liquidity/divisibility in case something like an urgent medical requirement comes up.

Anant Jain, Partner Legacy Growth

Senior Citizen Savings Scheme (‘SCSS’), being a government backed scheme with a decent return of 8%+ is generally preferred by the senior citizen who wants to have a periodic return. However, following could be the reasons for preferring other opportunities instead of SCSS:

Investment limit- The maximum investment limit is INR 30 Lakh which will provide a yearly return INR 2,46,000 (i.e. INR 20,500 per month) which may not be sufficient to meet the expenses of senior citizens. In the normal fixed deposits, generally there is no limit or a higher limit is permitted / provided

Interest rate – Currently, there are various banks which offer a higher interest rate upto 9% / 9.25% vis-a-vis 8.2% interest rate for SCSS

Fixed interest rate – Interest rate remains fixed for the entire 5 years which may sometime be lower than bank FD. For example if someone would have invested in April to Sep 2020 then the interest rate would have been 7.4% vis-a-vis current FD rate upto 9% / 9.25%

Liquidity – While premature withdrawal is permitted but it comes with a higher penalty / cost. No interest is paid for withdrawal in the first year and withdrawal in second year would attract a pendaly of 1.5% of deposit amount.

SCSS has its own advantages; but investment in it should be planned after considering all aspects e.g. liquidity needs, periodicity of return, interest rate trend, risk appetite etc.

Somya Srivastava, CEO, Prayatna Microfinance

Although the Senior Citizen Savings Scheme (SCSS) may seem like an appealing option for senior citizens, it is important to consider alternative investment options. The interest earned from SCSS deposits becomes taxable if it exceeds the Rs 50,000 limit in a financial year.

Closing an SCSS account prematurely attracts deduction from principal amount. According to SCSS Rule 2019, if the interest payable every quarter is not claimed by an account holder, such interest shall not earn additional interest.

However, the current rate of 8.2% interest on SCSS deposits makes the scheme better than 5-year FD schemes offered by banks. Moreover, investments up to Rs 1.5 lakh in a year in the SCSS account qualify for deduction under Section 80C.

Pamarty Venkataramana ( PVR ) is an International Corporate Lawyer from New Delhi, lndia. A Prolific Columnist on Business, Commerce and Policy matters

It is important for senior citizens to consult with financial advisors and explore a wide range of investment options that align with their risk tolerance, financial goals, and liquidity requirements. Diversifying investments across different asset classes can help minimize risk and maximize potential returns. The SCSS has a maximum investment tenure of 5 years, which may not be ideal for senior citizens who are looking for long-term investment options. They may explore alternatives that offer potentially higher returns on their investments to combat inflation and meet their financial goals effectively.

While the SCSS offers guaranteed returns, it may not adequately address the impact of inflation over time. Inflation erodes the purchasing power of money, and senior citizens should consider investment options that have the potential to generate returns that outpace inflation to maintain their standard of living in the long run.