All retired senior citizens are finding it difficult to meet both their ends due to the double whammy of constant inflation accompanied with reducing interest rates all around. The interest rates offered by banks on fixed deposits have come down to around 6%. Though the private banks and corporate offer higher rates, they cannot risk their limited resources there. In such an environment, government-guaranteed Senior Citizen Savings Scheme (SCSS) offers a better alternative.
Let us discuss the important features of SCSS.
Who can deposit money in SCSS
Only an individual resident under FEMA (Foreign Exchange Management Act) over 60 years can open an account under SCSS. The account under this scheme can either be single or a joint account with your spouse only. As eligibility under this scheme is evaluated with reference to only the first holder, your spouse even below 60 can be made a second holder. Your spouse can also open her/his account under SCSS as the first holder if the conditions are satisfied.
Though Non-residents are not allowed to open an SCSS account, but they can continue the account after they become a non-resident. However, they are not allowed to renew it beyond the initial tenure of five years. You can open an SCSS account with any post office or the designated branches of authorized banks. An HUF cannot open an account under SCSS.
For those who have taken voluntary retirement or have retired on superannuation can open this account even before the completion of 60 years of age, but not before completing 55 years. In such cases the account has to be opened within one month from the date of receipt of the retirement benefits. In case of a retired personnel of defence services, the same can be opened even after 50 years of age. The deposits made by those below 60 years shall be limited to retirement benefits but maximum up to 15 lakh.
Nomination and closure of account on death of the account holder
You are allowed to make nominations in favour of one or more persons. The nomination can be made initially or can be made, cancelled or modified anytime during the lifetime of an account holder.
Ceiling on deposit of money under SCSS
You can open one or more accounts under SCSS but are allowed to have deposits of maximum Rs 15 lakh in all the accounts, put together at any given point of time. So one can deposit Rs 15 lakh at one go or stagger over a period of time. The ceiling of Rs 15 lakh is computed with reference to the first holder only.
Tenure and premature withdrawal
The SCSS has an initial tenure of five years, which can be extended only once for a period of three years. During the currency of the account, you are allowed to prematurely withdraw the money but not before the completion of one year though with some penalty. In case the account is closed before the second year, a penalty of 1.5% of the deposit amount is recovered. For the accounts closed after two years, the applicable penalty is 1%.
As you cannot withdraw any money deposited under this scheme during the first year, please assess your funds requirement for one year properly before committing your funds to this scheme.
Rate of interest
The interest on deposits under this scheme is announced by the government for each quarter in advance. The rate applicable for the entire tenure is the rate prevalent at the time of making the deposits and will not be subject to change during the first five years. For extension, the rate applicable will be that prevailing then. The interest rate notified for the quarter beginning 1st July, 2020 is 7.4%. The interest under SCSS is payable quarterly. There is no cumulative option under SCSS. First interest is paid from the date of making the deposit till the end of the quarter and subsequently for each quarter.
Tax provisions applicable for deposits and interest
The deposits made under SCSS are eligible for deduction under Section 80C up to Rs 1.50 lakh each year along with other eligible items. This provision is significant when other avenues for claiming tax deductions under Section 80C like life insurance premium, payment towards pension plan, contribution to EPF account, ULIP etc. are no longer workable for senior citizens. So instead of putting the entire amount of Rs 15 lakh in a single year, you can spread the same over the years to maximize the benefits under Section 80C.
The interest received under SCSS is fully taxable. The bank will deduct tax @ 10% if the amount of interest exceeds Rs 50,000 in a year for senior citizen account holders. For others, the threshold limit for TDS is Rs 40,000 per annum. In case interest for the whole year exceeds the threshold of TDS, you can submit Form 15H if you are a senior citizen or 15G in other cases for receipt of interest without deduction of tax at source if you are eligible to submit such forms.
If you are a senior citizen and have made deposits under this scheme, you are entitled to claim a deduction up to Rs 50,000 for interest received under this scheme along with other interest earned by you from banks and post offices under Section 80 TTB.
Who can claim the money on death of the account holder?
In the eventuality of death of a single holder, the balance outstanding under the scheme with interest becomes payable to the nominee/s in case a nomination is made. In case the nomination is not made, the legal hairs can claim it after following a tedious procedure. So, it is advisable to have the nomination made at the time of making the deposits.
In case of joint accounts, the spouse gets an option to continue with the scheme. In case the spouse does not want to continue, the money can be withdrawn. In case the spouse already has deposits under this scheme, the aggregate of deposits under this scheme is restricted to Rs 15 lakh. In case the aggregate exceeds the threshold, the spouse has to withdraw the excess deposit.
Since the deposits under this scheme earn you higher returns than those generally available under other comparable safe investment avenues, it should be the first choice of senior citizens who want risk-free returns on their investments.
(The writer is a tax and investment expert and can be reached at email@example.com)