Senior Citizens Savings Scheme: Should elders close SCSS accounts and invest in new ones for a higher return?
2 min read 11 May 2023, 12:29 PM ISTSenior Citizens Savings Scheme: According to the SCSS rules, an account can be closed before the 5-year maturity period, but premature closure will incur a penalty
PremiumSenior Citizens Savings Scheme: With the recent hike of the SCSS interest rate to 8.2% by the Government, elderly people now have the opportunity to benefit from the additional 0.8% interest. According to money experts, senior citizens can take benefit from the higher interest rate by closing the previous SCSS account after assessing whether the penalty for closing an old account is less than the additional interest earned in the new account.
“Following the completion of a year, the senior person may prematurely withdraw from SCSS. If a withdrawal is taken after a year has passed but before a period of two years has passed from the date of the deposit, a penalty of 1.50% of the deposit will be assessed," said Vinit Khandare, CEO and Founder, MyFundBazaar.
According to the SCSS rules, an account can be closed before the 5-year maturity period, but premature closure will incur a penalty. The account can be closed before the 5-year maturity period, but the penalties must be paid, said Archit Gupta of Clear.
SCSS rules on premature account closure
1)If the account is closed within the first year of opening, no interest will be paid
2)If the account is closed after one year but before two years, a deduction of 1.5% of the principal amount will be made.
3)If the account is closed after two years but before five years, a deduction of 1% of the principal amount will be made.
In which scenario, switching to a new SCSS account will be beneficial?
For example, if a senior citizen invested ₹10 lakh in an SCSS account in February 2022 at a 7.4% interest rate, the quarterly interest would be ₹18,500. If they want to switch to a new account with an 8.2% interest rate, they would have to pay a penalty of 1.5% of the principal amount, which is ₹15,000. In this case, switching to the new account would be beneficial because the benefits outweigh the penalty for premature withdrawal. However, one should also consider the tax implications before making the switch, said Archit Gupta.
What if the senior citizen availed tax-benefit on the SCSS account they want to close?
Individuals who invest in SCSS can avail of a tax deduction of up to ₹1.5 lakhs under Section 80C. “If a senior citizen has already claimed this deduction and decides to prematurely close the account, they will have to pay tax on the previously exempted amount as the account has a maturity period of 5 years. To avoid losing the tax benefit, senior citizens can retain ₹1.5 lakh in the old account and only withdraw the amount in excess of ₹1.5 lakhs," explained Gupta.
Senior Citizens' Savings Scheme interest rate
The interest rate of SCSS has been hiked from 8 per cent to 8.2 per cent for the April-June quarter. Once the investment is done the interest rate remains fixed throughout the tenure. While presenting Union Budget 2023, Finance Minister Nirmala Sitharaman announced an increase in the deposit limit under SCSS to ₹30 lakh, from ₹15 lakh for a single account holder from this financial year.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
