During our entire work life, we get used to getting salary cheques at the end of the month and using the funds to meet our expenses. Once we retire, the game stops. There are no salary cheques at the end of every month. Though the salary has stopped, the expenses haven’t. And it is not easy to change or shun money or expense management skills that have been developed over a long period of 35-40 years. So, you need regular income to replace your salary even after retirement.
Therefore, before retirement, you work hard to build a retirement corpus that can be used to generate regular income once you retire. Well, you have built a good retirement corpus. But, how do you use the corpus to generate regular income? The first product that comes to mind is a pension plan or an annuity product.
Under a pension plan/annuity product, you pay a lumpsum amount to an insurance company. The insurance company, in turn, provides you regular income for life (or a fixed period as per product terms). There are many variants of annuity products available. You can choose one that suits your requirements. However, annuity products have their own set of problems. For instance, the annuity rates are quite low (6%-7% p.a.). At 7%, to get annual income of Rs 2 lacs per annum for life, you will have to purchase annuity plan for Rs 28.5 lacs. Do we have other products around which can provide better returns?
In one of earlier posts, we showed you how to use PPF as a pension tool. PPF provides better returns than an annuity product. Returns are tax-free (pension income is taxable). The limitation is that there is just one withdrawal allowed per year. Additionally, such flexibility to use it as a pension tool is possible only after initial maturity of 15 years.
What if you do not have a PPF account or you opened your PPF account only five years back? In this post, we will review Senior Citizens Savings Scheme (SCSS), a savings product which has been designed specifically for senior citizens. We will discuss the eligibility criteria, maturity, deposit limits, interest rates and tax treatment. We will also discuss how SCSS account fares against other income products available in the market.
Senior Citizens Savings Scheme (SCSS)
Only an individual aged 60 or more can open this account. There is relaxation in age limit to 55 for those retiring on superannuation or opting for voluntary retirement subject to certain conditions. Retired defence personnel (excluding civilian defence employees) can subscribe to the scheme irrespective of the age limit.
Non-resident Indians (NRIs) and Hindu Undivided Families (HUF) are not eligible to open SCSS accounts. If a depositor becomes an NRI after opening an account, he/she may continue to hold the account till its maturity.
Where to open?
You can open this account in any post office, public sector banks and select private sector banks.
Maturity period is 5 years. The account can be extended for further three years (only once) at the end of 5 years. In case of extension, the investor can close the account any time after one year without any penalty. This facility of extension is not available to NRIs.
Interest is paid out quarterly on 1st working day of April, July, October and January. The interest rate is not fixed and is notified by Ministry of Finance every
year quarter. For FY2015-2016, applicable interest rate is 9.3% p.a. The current rate of interest is 8.3% p.a. (Jan-March 2018)
For the latest update on interest rates for various small savings schemes such as PPF, SSY and SCSS, please refer to this post.
Since the interest is paid out quarterly, there will be no compounding on interest.
Please note that the rate of interest on an investment/deposit remains unchanged for the entire duration of the investment till maturity. For instance, if you deposit Rs 2 lacs in SCSS and the prevailing interest rate is 8.6% p.a., you will earn 8.6% p.a. for the duration of such investment. Even if the government changes the interest rate offered on such scheme in the future, you will earn 8.6% during the entire term.
There can be only one deposit in the account. You cannot make multiple deposits in the same account. Any number of accounts can be opened but the total balance in all the accounts cannot exceed Rs 15 lacs.
An individual may open the account in individual capacity or jointly with the spouse. In case of a joint account, the age of the first applicant is considered for eligibility. There is no restriction on the age of second applicant. The entire amount is attributed to the first holder.
If you want to contribute maximum amount to the Senior Citizens Savings Scheme, you can do either of the following:
- You and your spouse can open individual accounts with Rs 15 lacs in each of the accounts
- You can open two joint accounts. You can be the first holder in one account while your spouse can be the first holder in the other account. Deposit Rs 15 lacs in each of the accounts
This way, you can deposit/invest Rs 30 lacs in the SCSS for the family.
Investment under the scheme qualifies for tax deduction under Section 80C.
Interest earned is taxable.
There is tax deduction at source (TDS) if the interest earned for the financial year is more than Rs 10,000. Rate of TDS is 10% (20% in case PAN has not been provided)
If no TDS has been deducted, it does not mean you do not have any liability. You need to include the entire interest income in your income tax return and pay income tax, if required. Additionally, even if TDS has been deducted, you may still have to pay additional tax if you fall in the higher tax bracket.
For instance, if you earn interest of Rs 20,000, TDS of Rs 2,000 will be deducted. However, if you fall in 30% bracket, your tax liability will be Rs 6,000. You need to pay the remaining Rs 4,000 while filing your income tax return.
Submission of Form 15G/Form 15H
To avoid tax deduction at source (TDS), you can furnish Form 15G/15H with the post office/bank. Form 15G can be submitted by depositors below 60 years of age and Form 15H by depositors above 60 years.
You can file Form 15G if your estimated income tax for the financial year is Nil and your total interest income is less than minimum tax exemption limit (Rs 2.5 lacs). Please note both the conditions have to be satisfied.
There is relaxation of second condition in case of filing Form 15H. You can file for Form 15H if your estimated income tax for the financial year is Nil. So, if you are above 60, you can furnish Form 15H if your total taxable income is less than Rs 3 lacs (Rs 5 lacs for people above 80).
You are advised to check eligibility for submission of Form 15G/Form 15H before submitting Form 15G/15H to the post office/bank. A false or wrong declaration may attract penalty or imprisonment under Section 277 of the Income Tax Act. Read more about Form 15G/15H in this Business Standard article.
How to maximise tax benefits?
Since you get the benefits under 80C of Income Tax Act for investing in SCSS, you can stagger your investments in SCSS to get the maximum income tax benefit. For example, if you want to invest Rs 7.5 lacs in SCSS, you can invest Rs 1.5 lacs every year for five years to get the maximum tax benefit.
Please note this is a generic suggestion to maximize benefits under Section 80C. You must consider additional information, including but not limited to your taxable income, other committed 80C investments etc. You can also seek services of a tax consultant or a financial planner to help you plan your taxes better.
Premature withdrawal/exit/closure from the scheme is allowed after 1 year with penalty of 1.5% of the deposit amount. After 2 years, the penalty amount goes down to 1% of the deposit amount. Partial withdrawal is not allowed i.e. you cannot withdraw part deposit amount from the account. The account has to be closed completely if you want to access your principal amount.
Please note that in case of premature closure of the SCSS account, tax benefits claimed under Section 80C will be reversed. Therefore, in case of closure before 5 years, the deposit amount (up to Rs 1.5 lacs), along with accrued interest, shall be added to the income of the depositor and taxed accordingly.
Operation of account in contravention of SCSS Rules
If found that the account has been opened in contravention of the SCSS account rules (e.g. investment more than Rs 15 lacs across accounts), the account shall be closed immediately. The deposit in the account shall be refunded to the depositor after deducting any interest already paid.
Let’s compare SCSS with other regular income products available in the markets.
Senior Citizens Savings Scheme vs. Pension plans
Prevailing annuity rates are around 6-7%. Hence, in comparison, SCSS offers a much higher interest. Income from both pension plans and SCSS is taxable. Given that the tax treatment is same, SCSS offers much higher income as compared to any annuity/pension plan. The only limitation is the maximum investment limit of Rs 15 lacs. Therefore, the maximum income from SCSS can be
Rs 1.39 lacs (at 9.3% per annum) Rs 1.29 lacs (at 8,6% p.a.). You can double the amount if your spouse opens SCSS account and deposits the maximum amount. You need to see if this amount is going to be enough.
Additionally, by purchasing a pension plan, you lock in interest rate for the entire tenor of the pension plan (may be your entire life). However, under SCSS, you can lock in the interest rate for only 5 years (8 years if you opt for extension).
Senior Citizens Savings Scheme vs. Bank Fixed Deposits
Every bank offers special rates to senior citizens. For any tenor, senior citizens are offered 0.25% to 0.5% more. SBI FD (for 5 years) offers 8.0% to senior citizens currently. You can opt for monthly or quarterly payout in a fixed deposit. SCSS offers only quarterly payout. Though interest rates for bank FDs keep changing, these are likely to be lower than SCSS interest rate. Additionally, not all bank FDs will give you benefit under Section 80C. However, there is a maximum investment limit in SCSS.
Senior Citizens Savings Scheme vs. Public Provident Fund (PPF)
These are not exactly comparable. PPF is primarily a wealth accumulation tool. SCSS, on the other hand, is an income generation instrument. We did discuss a way to use PPF as a pension instrument in one of our earlier posts. But, you can do that only after initial maturity of 15 years. Additionally, only one withdrawal is permitted every year. So, that requires a lot of planning. With SCSS, you can simply go to a bank/post office, open an account and start getting regular income.
PPF currently offers
8.7% p.a. 8.1% p.a. while SCSS offers 9.3% p.a 8.6% p.a. PPF interest rate changes every year. Interest rate for SCSS is notified every year. Both the interest rates are subject to revision eery quarter. However, your investment earns the same interest rate (as at the time of deposit) for the entire duration of the deposit. PPF interest income and withdrawals are tax free while SCSS interest is taxable. So, if you have planned well and have a sizeable corpus in your PPF, PPF will give better results than SCSS ( for those whose taxable income is more than tax exemption limit).
Senior Citizens Saving Scheme (SCSS) is a good product for senior citizens. It offers high interest rates and gets them tax deduction under Section 80C. You can stagger your investment across different years to get maximum benefit under Section 80C. Those who seek regular income from their investments can opt for this scheme. It is not suitable for those looking for growth as there is no element of compounding (Interest is paid out quarterly).
We have compared SCSS with other products which can be used to generate regular income in retirement. There is no clear cut best product. Choice will depend on an individual’s requirements and financial situation. SCSS offers better interest rates than all the products discussed. However, you can only deposit a maximum of Rs 15 lacs in SCSS account (Rs 30 lacs if your spouse also contributes maximum amount). This limits the regular income from SCSS deposits. Hence, you may have to use other income products, along with SCSS, to generate regular income you need during retirement.
We have put emphasis on regular income products after retirement. However, with the increase in life-expectancy, over reliance on income products may cause problems. Your income from these products will stay constant while your expenses will increase with inflation. You need a good mix of income and growth assets (that give benefit of compounding such as mutual funds, stocks, real estate etc) in your retirement portfolio. Growth assets will help you counter inflation. Exact allocation between your income and growth assets will depend on your financial risk profile. You may seek services of fee-only financial planner or a SEBI registered investment adviser to advise you in this matter.
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