Senior Citizen Savings Scheme (SCSS) rule change: Multiple 3-year extensions available now; should you opt for it or avoid? On maturity, the deposited amount is paid back to the SCSS investor. The depositor has the option to extend the scheme by three years. What has changed? Earlier, an SCSS account holder could extend the maturity by only three years. Now, the beneficiary gets the chance to extend the SCSS account multiple times in a block of three years for unlimited times
You can now extend your Senior Citizen Savings Scheme (SCSS) account multiple times, in blocks of three years each. Earlier, you were allowed to extend it only once, and for three years, at the end of the five-year SCSS account term. However, an account holder extending the scheme will not get deduction benefit under Section 80C on the investment.For the October-December quarter, SCSS offers an interest rate of 8.2% per annum.
So, should you extend your SCSS account on maturity, or should you open a new SCSS account and reinvest the money? How to decide if extending the SCSS account for three years will help you in the long run? Read on to find out.
SCSS account extension: What is the new rule?
A Senior Citizen Savings Scheme pays quarterly interest to the depositors during its tenure of five years. On maturity, the deposited amount is paid back to the SCSS investor. The depositor has the option to extend the scheme by three years. What has changed? Earlier, an SCSS account holder could extend the maturity by only three years. Now, the beneficiary gets the chance to extend the SCSS account multiple times in a block of three years for unlimited times.
Also Read: Senior Citizens Savings Scheme (SCSS) premature withdrawal rules changed; check details
To extend the maturity of an SCSS account, the depositor needs to submit a request in the prescribed form within one year from the date of maturity or from the date of the end of each block period of three years, provided the depositor has not closed the account. You can get the request form from the post office or the bank where you have opened your SCSS account.
While going for an extension of the SCSS account, keep a few things in mind:
1) The date of the extension will start from the original date of maturity — i.e., the day when the SCSS deposit completed five years — and not when you make the request.
2) During the extension period, the SCSS deposit will earn interest at the rate applicable on the day when the account was originally scheduled for maturity.
3) You usually get an extension only on the original investment that has completed five years.
4) After extension, you can withdraw the deposit and close the account at any time after a year, without any deduction.
Will extended SCSS accounts be eligible for tax deduction under Section 80C?
SCSS investments are eligible for a tax deduction under Section 80C of the Income-tax Act, 1961. However, the maximum deduction under Section 80C is restricted to Rs 1.5 lakh. So even if you have invested Rs 5 lakh in your SCSS account, you will be eligible to claim a tax deduction on an investment of only Rs 1.5 lakh.
Remember that you are eligible to claim the tax deduction under Section 80C when you open a fresh SCSS account. You cannot claim any tax deduction for extending an SCSS account, says Abhishek Kumar, Founder of SahajMoney.com.
Further, the interest earned on an SCSS deposit is fully taxable as per the tax slab applicable to your income. TDS is applicable on the interest. However, senior citizens can claim a deduction of Rs 50,000 under Section 80TTB of the Income-tax Act, 1961, on the interest income. Further, if the total income does not exceed the minimum taxable threshold, the depositor can request the bank to not deduct TDS, by giving a declaration in Form 15H.
8.2% interest on SCSS vs 9.5% interest on senior citizen FDs: Where to invest for better returns?
Senior Citizen Savings Scheme is backed by the Central Government. So your money is safe. At present, it offers 8.2% interest per annum, the highest among small savings schemes. Interest from an SCSS account is automatically credited quarterly to your savings account. Once you invest, the interest will remain locked for three years.
Several banks offer over 8% interest on fixed deposits to senior citizens. Some small finance banks even offer as high as 9.5% interest on senior citizen FDs. Unity Small Finance Bank offers 9.5% for FDs maturing in 1,001 days. Utkarsh Small Finance Bank offers 9.10% for FDs maturing between two and three years.
Among the traditional scheduled commercial banks, DCB Bank offers 8.5% on deposits maturing between 25 and 26 months. For FDs maturing between 37 and 38 months, the bank offers 8.5% interest to senior citizens. Bandhan Bank offers an interest rate of 8.35% to senior citizens for FDs maturing in 500 days. IDFC First Bank and IndusInd Bank also offer 8.25% on senior citizen FDs.
Deposits in banks, including small finance banks, are protected by the deposit insurance programme but only up to Rs 5 lakh. This includes both the principal and the interest.
When your SCSS account matures, you can consider moving the money in to FDs offering slightly higher interest rates, especially during a high-interest rate regime. You can opt for non-cumulative FDs for quarterly pay-outs. However, you will miss out on the benefit of compounding.
The decision will depend on your investment horizon and goals.
Who should extend their SCSS accounts, and who shouldn't?
Now, who should extend the SCSS account for three years and who should avoid doing it?
There is no straightforward answer to this. Whether you should extend the SCSS account for another three years , will depend on how much interest you are getting while reinvesting, how much money you have accumulated, and how much cash flow you will need in the coming years.
“Those senior citizens who want a risk-free quarterly income will benefit from this change as now they can extend it indefinitely in a block for three years after the initial lock-in period of five years,” says Kumar.
First, check how much returns you are getting from your SCSS accounts. The central government revises the interest rate of the Senior Citizen Savings Scheme every quarter. It is important to compare the return from SCSS with that of other products such as senior citizen FDs before reinvesting.
You can also divide your funds into a few parts and invest some in SCSS and the rest in banks giving higher returns. But it would be prudent to keep your bank exposure limited to Rs 5 lakh so that it is fully protected.
If you want cash at regular intervals during your retirement years, a short lock-in period of three years, through extension, will make more sense than reinvesting the money in a new SCSS account for five years.
Extending an SCSS offers retired people a much-needed liquidity option to take care of emergencies during a phase of life when they do not usually have a regular income. If you have extended your SCSS investment for 3 years, withdraw the entire amount after a year of deposit to get the money back without any deduction. Then reinvest the money as required.
If you do not have enough savings for medical emergencies in old age, extending your SCSS account for another three years is advisable, rather than opening a new one again for five years.
Retirees who have planned their retirement ahead of time and have accumulated a sizable retirement corpus for medical emergencies can also invest in an SCSS account.
“(For an investment of five years), the extension will be of benefit to retirees in the lower tax brackets, since interest rates paid by the SCSS are generally higher than five-year bank FDs. But the interest is taxable. The current interest rate is 8.2%, which means that retirees in the lower tax bracket can earn a higher post-tax return from this scheme compared to bank FDs,” says Abhijit Talukdar, a SEBI-registered financial adviser.
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This story originally appeared on: India Times - Author:Faqs of Insurances
