The Senior Citizen Savings Scheme (SCSS) interest rates have been increased to 8.2% recently (for April-June quarter of FY2023-24). More details here.
For many Indians investing in debt, 8% is the psychological level for which they wait for to get returns from debt. And this is more applicable to senior citizens who depend on debt instruments for regular income during retirement life.
So with SCSS rates at 8.2%, should senior citizens invest more in Senior Citizen Savings Scheme? We try to answer this here.
But first a brief refresher about Senior Citizen Savings Scheme (SCSS) features and rules.
Senior Citizen Savings Scheme (Features 2023)
- Senior Citizen Savings Scheme is a debt product focused and available only for Senior Citizens.
- It offers (almost) risk-free, government-backed fixed interest payouts.
- Currently the interest rate is 8.2% per annum but, is paid out on a quarterly basis on 31st March, 30th June, 30th September and 31st December of every year.
- Since the interest is paid out quarterly, there will be no compounding on interest.
- The SCSS rates are reviewed and announced quarterly (together with all other small savings scheme). But once a SCSS account is opened at the given rate, that interest rate is locked-in for the full tenure. That is, the rate at the time of account opening applies to the full tenure of the account.
- It has a maturity period of 5 years, with the option to extend SCSS for 3 more years. But the extension can be availed only once. And the interest rate during extended period will be what is applicable as per the then SCSS rates, on the date of the account renewal.
- A senior individual can invest a maximum of Rs 30 lakh in SCSS. The SCSS limit increased to Rs 30 lakh recently. So for a couple where both are seniors, a total of Rs 60 lakh can be invested if both account holders may open separate SCSS accounts.
- The amount deposited in SCSS account qualifies for tax deduction under Section 80C of IT Act (up to Rs 1.5 lakh per year). But the interest income earned from SCSS is fully taxable as per the income tax slab of the senior citizen.
- Seniors can invest in this scheme through Post Office or Scheduled Commercial Banks.
So that were the basic of SCSS. Now let’s come to the main question.
Should Seniors Invest in SCSS at 8.2%?
At 8.2% interest rate after the hike (from 8% earlier), the SCSS remains among the best options for senior citizens wanting to generate risk-free regular income. In last few years when the interest rates had fallen substantially, the senior citizens were the worst affected. And even though there are small chances of further rate hikes, they may not be substantial. So even at the current 8.2%, SCSS scheme does look attractive and worth considering for senior citizens.
This is more so because the government has phased out the erstwhile PMVVY (Pradhan Mantri Vaya Vandana Yojana) scheme, which offered similar interest rates but had a longer lock-in, as well as interest certainty of 10 years, compared to SCSS’s 5 years.
The PMVVY came to an end on 31st March 2023. But as a compensation, the government did double SCSS limit to Rs 30 lakh from earlier Rs 15 lakh. You can check a comparison of both schemes at PMVVY vs SCSS.
Just a month or two before the PMVVY’s coming retirement in March 2023, there was a period where a senior citizen couple could invest Rs 1.08 crore in SCSS, PMVVY, POMIS to get Rs 8.3 lakh in interest income without taking any risk at all! One can still invest a little less than that due to unavailability of PMVVY now.
But coming back, even though SCSS looks attractive, one needs to keep a few more things in mind:
- One is the premature withdrawal/closure of the scheme. As per the current SCSS rules, one can prematurely close SCSS account after 1 year with 1.5% penalty of the deposit amount. After 2 years, the penalty is 1%. Partial withdrawal isn’t allowed so you need to close the account even if you need a part of the money back. So don’t park funds here which you may need during the next 5 years. Use Fixed Deposits in safest banks to park such short-term money.
- Another is that 8.2% rate is locked for 5 years, but it is open to reinvestment risk when it matures after 5 years. What will one do if the rates are much lower then? Say they are 5-6%. That is one risk to be aware of even if one doesn’t want to tackle it now. The solution (though not perfect) is annuities. In an annuity, one pays a one-time lumpsum amount to an insurer and that guarantees income (at fixed interest rate) for rest of the life. Generally, the annuity rates as of now are around 6%. But that is guaranteed for the rest of the life.
Where should Senior Citizens Invest (2023)?
The very first thing that senior citizens should do is always keep some funds in simple bank FDs as emergency fund. It might be equal to say 1 years’ worth of expenses.
They should also assess their monthly expense/income requirement and accordingly invest money in interest-generating products like SCSS, POMIS, FDs, etc. And that is after accounting for their pension, rentals, etc.
Generally, its best to take a 2-3 bucket approach to retirement planning. The first bucket (say made up of 60-70% corpus) is made up of debt instruments like SCSS, PMVVY, POMIS, PPF, debt funds, annuities, etc. to generate regular income for the retiree. The second bucket should be invested in inflation-beating instruments like equity funds to ensure that you don’t run out of money in the later years of your life.
All said and done, if you are a senior citizen, who is considering to invest fresh money (or invest more if already invested earlier), then you can consider SCSS at 8.2% for further safeguarding your interest income needs in India (2023).
Related Readings – Is Rs 1 crore enough to retire? And if not, then is a higher Rs 5 crore enough to retire in India today?