The finance ministry has extended tax benefits under section 80C to the Senior Citizen Savings Scheme. Tax paying senior citizens can now claim a deduction of Rs 1 lakh invested in the schemes from assessment year 2008-09. Now the senior citizens have a reason to cheer.
In August 2004 the Senior Citizen Savings Scheme (SCSS) was launched. Any person who is 55 or more and has retired on superannuation or voluntarily can invest up to a maximum of Rs 15 lakh in this scheme.
Under this scheme the interest is paid to the depositor at the end of every three months. Though withdrawal before five years of opening an account was not allowed in SCSS, the assured annual interest of 9 per cent vis-à-vis a 7 to 7.5 per cent interest in bank fixed deposits at that time made this scheme popular
However, in March last year the government announced that interest payment in SCSS was liable to tax deduction at source from the inception of the scheme.
Then why do we say that the scheme has turned out to be the most attractive among fixed return instruments? Let’s have a look at the other options and see how they match up.
The ministry has also extended the tax concession to the five-year post office term deposit, though the concession doesn’t add any glitter to the scheme that pays a 7.5 per cent interest compared with 8 per cent by National Savings Certificate and Public Provident Fund. Even banks are offering between 8.5 and 8.75 per cent for their tax saving as well as normal deposits of five years.
Senior citizens, who look for a regular interest income, usually prefer the post office monthly income scheme (POMIS). The scheme offers an annual interest of 8 per cent, which is paid out on a monthly basis. Till February last year, depositors in POMIS used to get a 10 per cent bonus on maturity after six years. Last year the government withdrew the bonus. But looking at the coming elections the finance ministry has restored the bonus (5 per cent) on POMIS.
Some banks such as the Oriental Bank of Commerce, Uco Bank, Bank of India have tax saving fixed deposits which still fetches a higher interest for depositors who are above 60 years. But in this there is a limit of Rs 1 lakh, one cannot invest more than this in these deposits, whereas in a Senior Citizen Savings Scheme, one can invest up to Rs 15 lakh at 9 per cent annual interest.
However, most of the banks are giving a higher interest to their senior citizen depositors even if the deposit is not a tax-saving one. Here there is no limit on the amount that can be deposited.
But, now that banks have started reducing their deposit rates, it would be a wise move to keep one’s money in Senior Citizen Savings Scheme where the depositor can renew it for a block of three years on maturity of the initial investment after five years.
In a Senior Citizen Saving Scheme depositor will have to take out the interest payment every quarter, this gives him the chance to increase the return by reinvesting part or the whole of the interest payout in a five-year recurring deposit (if regular payouts are not needed) in a bank giving more than 8 per cent interest.
For example, if you deposit Rs 1 lakh in an SCSS, you will get Rs 9,000 as interest every year or Rs 45,000 in five years. You can open a five-year recurring deposit with a monthly deposit of Rs 750 and earn an annual interest of 8 per cent. After five years, you will amass Rs 55,535 in the recurring deposit account. That is a gain of Rs 10,535 per Rs 1 lakh in five years. However, you cannot follow this strategy if it is a bank fixed deposit because banks pay a cumulative interest. Rs 1 lakh kept in a five-year bank fixed deposit will earn you an interest of Rs 56,051 at maturity.
SCSS is the best scheme for elderly people for claiming tax deduction and regular income. For capital buildup, choose bank fixed deposits. If you have retirement savings of Rs 30 lakh, keep Rs 10 lakh in an SCSS account and Rs 20 lakh in a five-year bank fixed deposit. From the SCSS account, you will earn Rs 22,500 every three months (Rs 7,500 every month). From the bank fixed deposit, you will earn Rs 1,86,167 every year, if you take out the interest at the end of every year.