Latest news with #SeniorCitizensSavingsScheme
The Hindu
12-05-2025
- Business
- The Hindu
The importance of Small Savings Schemes
Small Savings Schemes, kown as Post Office Savings Schemes, are a popular and useful means for people for channelising savings. Credit quality is top-notch as it is run by the government, and interest rates are competitive. Interest rates are fixed by the government every quarter e.g. the rates for the current quarter, April to June 2025, were announced on March 31. Today we will see, on what basis the rates are fixed by the government. Basis for fixing rates As per an old decision of the Government, the rate of interest on Small Savings Schemes will be aligned with Government Security (G-Sec) rates of similar maturity with a spread i.e. mark-up. As an example, the spread on Senior Citizens Savings Scheme will be 1% over comparable maturity G-Secs. The rationale for linking it to G-Sec yields in the secondary market is that it is in line with interest rate movements; G-Sec yield movements reflect actual and anticipated economic events pertaining to interest rate movement. To clarify the concept, let us say the benchmark G-Sec rate is X% and the mark-up as per the formula is Y%. Hence, the rate should be X% plus Y%. However, if the rate is higher, say X% plus Y% plus Z%, then Z represents the generosity of the Government for the benefit of citizens. The rates on Small Savings Schemes are reviewed every quarter. However, rates are not revised downward every quarter even when G-Sec rates are sliding, which is the 'Z' referred earlier. Prevailing rates Post Office Savings Deposit rate is 4%. Public Provident Fund (PPF), which is a 15-year scheme (though it can be extended), is supposed to have a spread of 25 basis points (100 bps = 1%). The relevant G-Sec rate (the average of G-Sec of corresponding maturity from December 2024 to February 2025) relevant for the quarter April to June, was 6.85%. By that logic, PPF rate is (6.85 + 0.25= 7.1%) maintained now. Post Office Term deposits of 1, 2 and 3-year maturity are to be at the corresponding G-Sec rate, without any markup. For a 5-year term deposit, the spread is 25 bps. Against the reference G-Sec yield of 6.62%, it should have been 6.87%. The rate for a 5-year TD is 7.5%. The excess interest is 0.63%. This 63 bps is the 'Z' referred earlier. Kisan Vikas Patra (KVP) is at zero spread; with reference point at 6.85% and rate at 7.5%, the additional interest over formula is 0.65%. For NSC VIII Issue, which is at a mark-up of 25 bps, formula rate is 7.04%. At 7.7%, the additional interest is 0.66%. Senior Citizen Savings Scheme (SCSS), mentioned earlier, has the highest spread of 1% over reference G-Sec yield, as a social benevolence to take care of seniors, who may not have active income. At the reference 5-year G-Sec yield of 6.62%, the formula rate is 7.62%. The rate on offer is 8.2%, implying an additional interest (Z) of 0.58%. Sukanya Samriddhi The last is the Sukanya Samriddhi Account Scheme, which has the longest tenure of 21 years. The formula mark-up is 75 bps. The reference G-Sec yield is 6.85%. Against the formula rate of 7.6%, the rate is 8.2%. The additional interest a girl child would get this quarter is 0.6%. Interest rates are coming down, as the Reserve Bank of India (RBI) has been reducing the reference repo rate. The repo rate, which was 6.5% earlier, is at 6% now. It is expected that the RBI would cut the repo rate further. This is driven by lower inflation and economic growth being a little lower than earlier. Consequently, G-Sec yields have eased. As an example, 10-year maturity G-Sec, which was at 7.2% a year ago and 6.85% six months ago, is at 6.36% now. The reference G-Sec yield levels mentioned earlier pertain to the period December 2024 to February 2025. Since then, G-Sec yields are lower. The implication is, when rates for next quarter viz. July to September are announced on June 30, the reference point will be lower. Conclusion We have mentioned earlier, there is a 'generosity component' or 'Z' component in the currently prevailing Small Savings rates. With the reference rate coming down, if the government maintains the current rates, the 'Z' component will be higher. While it is possible it maintains current rates as there is a political implication of cutting it, pressure will be higher on government's finances. Hence there is a possibility Small Savings rates may be reduced going forward. From that perspective, if you have the money, it is advisable that you lock-in by June. (The writer is a corporate trainer (financial markets) and author)
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Business Standard
25-04-2025
- Business
- Business Standard
Explained: Can you break your SCSS deposit early, and what would it cost?
The Senior Citizen Savings Scheme (SCSS) has become one of the go-to investment options for senior citizens in India, offering a stable and secure way to grow their savings. With its high interest rates, government backing, and quarterly payouts, it's no wonder that SCSS is favored by retirees looking for predictable returns. However, life is unpredictable, and sometimes, unforeseen financial needs arise that require you to access your funds earlier than planned. So, what happens if you need to break your SCSS deposit early? Is it possible, and what are the consequences? What is the SCSS scheme? The Senior Citizen Savings Scheme (SCSS) is a government-backed savings scheme designed to provide a regular income stream for senior citizens. It offers a fixed interest rate and allows for both individual and joint accounts, primarily benefiting those 60 years and older. The scheme is a safe investment option, backed by the Indian government, and offers tax benefits. The Senior Citizen Savings Scheme was introduced in 2004 as a part of post office savings scheme, to provide financial security to senior citizens who are in need of a steady income post retirement. Residents aged more than 60 years, can individually or jointly open SCSS account. It can either be opened in a post office branch or an authorized bank. It offers an interest rate of 8.2% for the current quarter. This scheme supports a maximum deposit of Rs.30 lakhs, with a tenure of 5 years which can be further extended to 3 years. Deductions under section 80C of Income Tax Act is allowed for this scheme. However, interest on deposits are fully taxable. The current interest rate applicable to SCSS is 8.2% p.a. This interest rate is applicable for first quarter of financial year 2025-26. At 8.2% p.a. interest rate and an investment amount of Rs.30 lakh, the monthly income is stated to be Rs.20,500 per month for each investor. The maturity period of SCSS is 5 years. However, individuals can extend the maturity period for 3 more years by submitting an application. The application for an extension of maturity should be within one year from the date of maturity. Withdrawals from Senior Citizens Savings Scheme accounts will be exempt from tax starting August 29, 2024. Senior citizens are predominantly benefitted from this amendment. TDS (Tax Deducted at Source) is applicable on the interest earned if it exceeds ₹50,000 in a financial year (for senior citizens). Investments up to Rs 1.5 lakh in SCSS qualify for tax deductions under Section 80C of the Income Tax Act. Premature withdrawal before maturity: Yes, but with a cost SCSS has a default lock-in period of five years. However, the government does allow early closure—with penalties based on how long you've been invested. Value Research breaks this down: If withdrawn before 1 year: No interest is payable. Any interest already credited will be recovered from your principal. If withdrawn after 1 year but before 2 years: A penalty of 1.5 per cent of the deposit amount is deducted. If withdrawn after 2 years but before 5 years: A penalty of 1 per cent of the deposit amount is deducted ClearTax does a further deep dive: Within 1 Year of Deposit: If you wish to withdraw the SCSS deposit before the first year, the interest earned will be penalized. A penalty of 1.5% will be charged on the deposit amount, which means you will lose some interest earned on the deposit. After 1 Year but Before 2 Years: If the deposit is withdrawn after one year but before two years, the penalty reduces to 1%. After 2 Years: If you withdraw the deposit after two years but before the completion of the full five-year tenure, the penalty continues to be 1% of the deposit amount. It's important to note that if you break your SCSS account before maturity, you won't get the full interest rate and could face some loss of earnings. Conditions: One exception to the premature withdrawal penalty is in the unfortunate event of the account holder's death. If the account holder passes away, the SCSS deposit can be withdrawn without incurring any penalty on the interest. In this case, the nominee or legal heir will be entitled to the principal and the interest earned, without the penalty charges that would normally apply to premature withdrawals. Tax Implications of Premature Withdrawal When you break your SCSS deposit early, the tax treatment on the interest earned remains the same. Interest earned on SCSS is subject to taxation, and the amount is taxed according to your income tax bracket. However, the early withdrawal may affect how much you ultimately pay in taxes due to the reduced interest earnings after the penalty is applied. Additionally, Tax Deducted at Source (TDS) will be applicable if the interest earned exceeds ₹50,000 in a financial year (for senior citizens). The TDS will be deducted regardless of whether the deposit is withdrawn prematurely or not. What about maturity? You now have more flexibility "Previously, SCSS allowed only a one-time extension of three years. But rules have changed. Now, you can extend your SCSS deposit indefinitely in blocks of three years each. This is great news for retirees who don't want to reinvest elsewhere and prefer to continue earning a fixed return in a secure scheme. The extension must be requested within one year of maturity. The interest rate applicable will be the one prevailing at the time of extension," explained Value Research in a note. Can You Withdraw During the Extension Period of SCSS? Yes, you can withdraw from your SCSS account during the extension period. After the initial 5-year term, the SCSS account can be extended for an additional 3 years. The best part? Once you have completed one year of this extended block, there is no penalty for premature withdrawal. This offers senior citizens more flexibility, as they can still access their funds without being penalized. Why is This Advantageous? This is a key benefit of the SCSS extension feature. If your circumstances change or if an unexpected financial need arises, you don't have to be permanently locked into the scheme. The ability to withdraw funds after a year during the extension period means that, while you continue to earn interest, you are not stuck if you need liquidity. This flexibility makes SCSS a relatively adaptable investment for seniors who may need to adjust their financial plans over time. How to Exit the SCSS Scheme (During or After Extension Period) To exit the scheme, whether during the original five-year term or during an extended period, you need to follow a simple process: Visit the Bank or Post Office: Go to the bank or post office where you hold your SCSS account. Submit Form 2: Fill out and submit Form 2, which is the form used for premature closure of your SCSS account. Provide Necessary Documentation: You may also need to submit some documents, such as your account details, proof of identity, and any other documents required by the institution. Once your request is processed, you will receive the principal amount and the interest earned, minus any penalties if applicable (which is not the case during the extension period after one year). This flexibility provides senior citizens with peace of mind, knowing that their funds are not entirely locked in if they need them earlier than planned.
