The Senior Citizens Savings Scheme (2004) was introduced to secure the financial future of senior citizens, which offers a steady stream of income during their retirement. Backed by the government of India, SCSS provides a regular flow of income, assured returns, tax benefits, & safety, making it an appropriate choice for part of Retirement Planning. This scheme allows investors to invest funds in a lump sum, i.e. one single instalment, for a period of 5 years at an interest rate of 8.2% with quarterly payouts. It allows senior citizens to get their accounts opened either by visiting a bank or a post office. Though it assists in retirement planning, there are certain disadvantages that should be considered well in advance before investing the funds. Let us discuss them in detail:
Benefits of Senior Citizen Savings Scheme
Provided are the benefits of the Senior Citizen Savings Scheme
- Guaranteed Returns
This scheme offers investors a fixed rate of interest, which ensures them safe, secure & predictable returns.
- Quarterly Revision of Interest Rates
The interest rates offered under SCSS are derived depending upon multiple factors, like inflation rate, prevalent market rates of interest, etc. Once derived, they are revised on a quarterly basis as well.
- Maturity Tenure
The senior citizen savings scheme comes with a tenure of 5 years, which can further be extended for another 3 years.
- Minimum & Maximum Deposit
This scheme allows the minimum amount of deposit to be INR 1000. The maximum amount under this scheme can be INR 30 lakhs or the retirement benefit, whichever is lower.
- Quarterly Disbursal
This scheme allows quarterly disbursals of the interest amount, i.e. 1st day of April, July, October, & January.
- Premature Withdrawals & Account Closure
This scheme allows a premature withdrawal of the amount deposited after one year of its opening. In case the account is closed before 2 years, a penalty amount of 1.5% would be charged. If the account is closed after 2 years, a penalty of 1% will be charged.
- Mode of Deposit
The mode of deposit can be cash if the amount of deposit is less than INR 1 lakhs & it has to be in cheques if the amount is more than INR 1 lakhs.
- Security of Capital
This scheme is backed by the government. Hence, the amount of investors remains secure.
- Nomination Facility
Senior citizens can also appoint a nominee who will receive the amount due in case of their sudden demise.
Disadvantages of the Senior Citizen Savings Scheme
Provided are the disadvantages of SCSS:
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Age Limit & Restricted Liquidity
1. Early Retirement Eligibility:
The target audience of this plan is individuals with 60 years of age, hence if any individual wants to opt for VRS, i.e. early retirement, they will not get any immediate benefit provided by the scheme.
2. Absence of Immediate Liquidity:
In the event of unforeseen circumstances, financial requirements, or unforeseen expenditures, there is no provision of immediate access to funds.
3. Lock-in Period Hardship:
In the event of unforeseen circumstances, financial requirements, or unexpected expenditures, premature withdrawals are restricted or attract penalties due to the 5-year lock-in period.
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Constrained Investment Limit
1. Maximum Limit Set:
Due to the maximum investment limit being set at INR 30 lakhs, which is considered to be below the average amount according to the retiree’s capacity, with a large amount of savings.
2. Need for Diversification:
The limit applicable urges you to diversify the investments in different schemes, making the financial management & planning a bit complicated.
3. Missed Opportunities:
The limit applicable complicates the diversification of investments & misses out the opportunities for better growth.
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No Compounding on Interest
1. No Reinvestment of Interest:
Under this scheme, the interest earned does not get reinvested to reap further interest due to the power of compounding not being applicable.
2. Reduced Return Potential:
Also, the returns get reduced due to the compounding factor not being present in comparison to other investment plans.
3. Lost Growth Opportunity:
The quarterly payouts offer a regular source of income to the retirees, but the fixed interest structure results in missed opportunities for long-term wealth creation.
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Taxation on Interest Income
The interest received is fully taxable, which adds a financial burden on the retirees, impacting their net income as well.
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TDS Applicability on Interest Accrued
If the interest earned in this account is above INR 50,000 during a financial year, a TDS would be applicable @10%. In case the total income does not exceed this limit, submit Form 15H.
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Limited Accessibility
It cannot be availed through private banks or online platforms, as they are available at the post offices or public sector banks only. This may be inconvenient, difficult to manage, physically distressful for senior citizens.
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Non-transferability & No Loan Facility
This account does not facilitates the change in ownership, which might be problematic in certain unforeseen situations. Also, this account is not eligible for raising loans against this deposit.
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Premature Withdrawal Restrictions
This account allows premature withdrawal of funds, but only once the period of one year has been completed, & subject to certain other terms & conditions & penalties applicable.
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Inflation Impact
Due to the fixed interest rates & no compounding factor, this Retirement Plan is not able to beat the inflation. Because of inflation, the actual returns would be very less in longer run, reducing the buying capacity of the retirees.
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Reinvestment Risk at Maturity
Due to the uncertainty of future interest rates, it becomes difficult to plan a regular & consistent source of income, resulting in the lesser income.
Conclusion
A Senior Citizen Savings Scheme is undoubtedly a secured financial investment option which offers guaranteed returns, quarterly income, competitive interest rates, hassle-free registration, & tax benefits. Also, this scheme is backed by the government, hence offering safety & security along with no risk of capital loss. The scheme is drafted for senior citizens, offering them a regular source of income post their retirement. However, the limitations of SCSS should also be kept in mind by the investors, like lock-in period, investment cap, & lack of liquidity or inflation-adjusted returns. This plan is considered to be a main part of retirement planning, helping to build a balanced & flexible retirement plan.
