Fixed deposits (FD) is the most convenient and simple instrument of investment. In this you can know about the earnings at the time of making deposit but the difficult part is to match the amount of interest earned on these deposits with the amount received and the tax deducted at source.
Let us take a case study to understand this point.
For instance Rajesh invests Rs 100,000, for one-year each in two FDs, in the financial year 2009-10. One investment he did in the beginning of the 2009 and will mature in March 2010 at the rate of interest of 7%. The second investment he did in July 1, 2009 at 7.2 per cent. Both the FDs will give simple interest cumulated at maturity, though for accounting purposes the amount accrues to the investment at the end of each quarter. In case Rajesh considers the interest earned when it is received, how will he account for the second deposit? How to match the interest earned with the tax deducted by the bank?
How to tackle this issue
First, what is the method of recognizing the income or interest earned? One is the accrual method in this the amount accrued on the deposit during the year is considered as income, even if not received. The other is the income when actually received, the cash way of accounting.
Generally an investor will find the former method convenient, especially when the income with a bank is crossing Rs 10,000 in the year. Therefore, Tax Deduction at Source (TDS), will be done, it will be in tune with the route adopted by the bank.
Here, the bank will consider the income earned by the depositor till the end of financial year and then deducts the tax on it.
The tax authorities have said banks should deduct TDS only on the amount credited and not on the provisions made. Thus, Rajesh must know when bank is crediting income to his account, in this case, quarterly, and this is the figure to be taken for accounting purposes.
In this case the income will be credited with the maturity, for the deposit that is maturing in March 2010. Thus, the interest earned will be Rs 7,000 for the year. The interest earned will be included in the investor's total income. Hence the income is actually received, so there is no complication.
The second deposit will also pay the amount at maturity. This deposit will mature in one-year time on July 1, 2010. As it is clearly stated that deposit amount will accrues at the end of every quarter, there is a need to consider the income earned till the end of March. The bank will follow the same procedure and they will use this for tax deduction. The income earned, here, will be Rs 5,400 till the end of March. Hence the investor should consider the income till March 2010, even though he may not have received the amount from the bank.
The tricky part is the alignment for taxation. The investor will get the net amount after TDS, as the amount of interest earned will be crossing the limit of Rs 10,000 during the year. Let us make it simple for understanding. Suppose the interest of rate is 10 per cent (without cess) for tax deduction. Thus, the amount received by Rajesh will be reduced by Rs 1,240 (10 per cent of 7,000 plus 5,400) for the TDS and the net amount received will be Rs 4,160.
To calculate the total income earned during the year, Rajesh cannot add the amounts received, as there is a TDS amount involved. He has to gross the total amount earned, which will be Rs 7,000 plus Rs 5,400 that is a total of Rs 12,400. This figure will be included in the income for the year under the head of income from other sources. Thus, the total amount of income and the tax payable on this income will be calculated. From this, the TDS amount has already been deducted by the bank, Rs 1,240, will be adjusted and the whole process is completed.
Thursday, March 18, 2010
IOB hiked deposit rates, Central Bank reduces rates of loan for doctors, revise deposit rates
On Monday Indian Overseas Bank (IOB) has revised its deposits interest rate. The revised rates will be effective from March 15. As per revised rates for deposits of less than Rs 1 crore for tenure of 270 days and less than one year, the rate has been fixed at 6%, while for one year to less than five years at 6.75% and five years and above at 7.25%. And for a deposits of Rs 1 crore and above for a period of one year and above, the rate has been fixed at 6.5%.
Another bank Central Bank of India, a state-owned lender is offering loans to doctors at low interest rate. Bank has reduced interest rates on loans by 150 basis points for doctors for purchase of equipment and 100 basis points for construction of nursing home/ clinic/clinic cum residence (from 12% to 10.5 % for purchase of equipment and from 13 % to 11% construction of nursing home/ clinic/clinic cum residence.)
The bank has also announced wavier of the processing fee for its direct housing finance scheme, personal loan to corporate and non-corporate employees, Cent Jewel, teachers’ loan, Cent Vyapari, Cent Swabhiman plus until the end of the month.
The bank has also hiked its deposit rates on domestic term deposits from 25 basis points to 150 basis points on the deposits of Rs 15 lakh and above. The revised rates will be effective from Monday. The interest rate on domestic term deposits above Rs 15 lakh, but less than Rs 1 crore has been revised to 6.5% (6.25%) for the period one year to less than two years has been revised to 6.75% (6.5%) for two to less than three years and to 7% (6.5%) for three to less than five years.
Another bank Central Bank of India, a state-owned lender is offering loans to doctors at low interest rate. Bank has reduced interest rates on loans by 150 basis points for doctors for purchase of equipment and 100 basis points for construction of nursing home/ clinic/clinic cum residence (from 12% to 10.5 % for purchase of equipment and from 13 % to 11% construction of nursing home/ clinic/clinic cum residence.)
The bank has also announced wavier of the processing fee for its direct housing finance scheme, personal loan to corporate and non-corporate employees, Cent Jewel, teachers’ loan, Cent Vyapari, Cent Swabhiman plus until the end of the month.
The bank has also hiked its deposit rates on domestic term deposits from 25 basis points to 150 basis points on the deposits of Rs 15 lakh and above. The revised rates will be effective from Monday. The interest rate on domestic term deposits above Rs 15 lakh, but less than Rs 1 crore has been revised to 6.5% (6.25%) for the period one year to less than two years has been revised to 6.75% (6.5%) for two to less than three years and to 7% (6.5%) for three to less than five years.
Friday, February 26, 2010
Slowly banks are raising fixed deposit rates
In the coming months fixed deposit can again be a good investment option as the deposit rates are on their way up. But the things will get better in fiscal 2010-11.
Last week HDFC Bank had raised its deposit rates by 25-150 basis points (one basis point equals one-hundredth of 1%) across various terms. Earlier this month, IDBI Bank and ICICI Bank had raised the deposit rates by 25-50 basis points for some maturities, while J&K Bank had raised rates by 75 basis points on deposits above one year. The public sector Union Bank of India is proposed to raise deposit rates later this week. More banks are likely to follow the suit.
According to analysts the bigger banks will join the bandwagon to remain in competition. Ashish Gupta and Deepak Ramineedi, analysts at Credit Suisse, wrote in a report dated February 22, “With these rate actions, State Bank of India and ICICI Bank deposit rates are now at a 50-100 basis point discount (for some maturities) and they will now need to follow suit.”
But big bankers disagree with it. OP Bhatt, chairman, SBI, said in Delhi that his bank will not raise deposit rates before May-June as it has surplus liquidity (the amount of free money it had to give out as loans).
By the end of December 31, 2009, the bank liquidity was whopping over Rs 75,000 crore.
MD Mallya, chairman and managing director, Bank of Baroda said, “There is ample liquidity in the system. Hence, at the moment we are not looking at raising interest rates on deposits.”
But Gupta and Ramineedi of Credit Suisse said that “as loan growth (14.8% currently) accelerates and the central bank starts tightening money, this liquidity will also dry up soon.” In the recent past banks’ deposit growth rates have declined as much as four-year low of 17%. Therefore, banks raise lending rates then deposit rates have to rise.
Last week HDFC Bank had raised its deposit rates by 25-150 basis points (one basis point equals one-hundredth of 1%) across various terms. Earlier this month, IDBI Bank and ICICI Bank had raised the deposit rates by 25-50 basis points for some maturities, while J&K Bank had raised rates by 75 basis points on deposits above one year. The public sector Union Bank of India is proposed to raise deposit rates later this week. More banks are likely to follow the suit.
According to analysts the bigger banks will join the bandwagon to remain in competition. Ashish Gupta and Deepak Ramineedi, analysts at Credit Suisse, wrote in a report dated February 22, “With these rate actions, State Bank of India and ICICI Bank deposit rates are now at a 50-100 basis point discount (for some maturities) and they will now need to follow suit.”
But big bankers disagree with it. OP Bhatt, chairman, SBI, said in Delhi that his bank will not raise deposit rates before May-June as it has surplus liquidity (the amount of free money it had to give out as loans).
By the end of December 31, 2009, the bank liquidity was whopping over Rs 75,000 crore.
MD Mallya, chairman and managing director, Bank of Baroda said, “There is ample liquidity in the system. Hence, at the moment we are not looking at raising interest rates on deposits.”
But Gupta and Ramineedi of Credit Suisse said that “as loan growth (14.8% currently) accelerates and the central bank starts tightening money, this liquidity will also dry up soon.” In the recent past banks’ deposit growth rates have declined as much as four-year low of 17%. Therefore, banks raise lending rates then deposit rates have to rise.
Friday, February 19, 2010
Use FD overdraft to pay for big purchase deals
To make payment of big purchase deals go for overdraft facility rather than taking personal loan or swiping a credit card. In case of personal loan or credit card you have to pay high interest. Whereas in overdraft facility you can place a fixed deposit with a bank and avail this facility.
When you place your fixed deposit with bank you earn return on investment and can use the same money to leverage funds at a low interest rate which can be used for the payment of purchases.
Moreover in overdraft facility you can borrow funds at 1 per cent to 2 per cent above the fixed deposit rates. Currently, the deposit rates of most of the banks range from 6 per cent to 7.50 per cent for a one to three years time period. However, SBI is offering 6 per cent, ICICI Bank 6.25 per cent and HDFC Bank is offering 6.50 per cent interest on fixed deposits for a one-year period.
If the payment is done through credit card, it is split into equated monthly installments for over a period of one year, which means you might have to pay an interest of 36 per cent to 45 per cent per annum. Whereas personal loan is an unsecured loan, the interest rate can range from 16 to 18 per cent.
According to an official of Oriental Bank of Commerce, “It is always better to take an overdraft facility against a fixed deposit than pay through a credit card for long-term repayments’ because it will carry a minimum interest rate, even lower than personal loans”.
An official of United Bank of India said, “During the time when interest rates were very high, many customers who had placed their long-term fixed deposits managed at a very low rate to take the advantage by financing their purchase of cars.”
According to Financial planner Kartik Javeri, “During an emergency, it (overdraft) is the best source for financing, but one should also have the capability to pay money quickly.”
When you place your fixed deposit with bank you earn return on investment and can use the same money to leverage funds at a low interest rate which can be used for the payment of purchases.
Moreover in overdraft facility you can borrow funds at 1 per cent to 2 per cent above the fixed deposit rates. Currently, the deposit rates of most of the banks range from 6 per cent to 7.50 per cent for a one to three years time period. However, SBI is offering 6 per cent, ICICI Bank 6.25 per cent and HDFC Bank is offering 6.50 per cent interest on fixed deposits for a one-year period.
If the payment is done through credit card, it is split into equated monthly installments for over a period of one year, which means you might have to pay an interest of 36 per cent to 45 per cent per annum. Whereas personal loan is an unsecured loan, the interest rate can range from 16 to 18 per cent.
According to an official of Oriental Bank of Commerce, “It is always better to take an overdraft facility against a fixed deposit than pay through a credit card for long-term repayments’ because it will carry a minimum interest rate, even lower than personal loans”.
An official of United Bank of India said, “During the time when interest rates were very high, many customers who had placed their long-term fixed deposits managed at a very low rate to take the advantage by financing their purchase of cars.”
According to Financial planner Kartik Javeri, “During an emergency, it (overdraft) is the best source for financing, but one should also have the capability to pay money quickly.”
IDBI Bank raised deposit rates, introduced new slab of 500 days
IDBI Bank has increased its deposit rates by 25 basis points (bps) and has also added a new slab of 500 days offering 7 per cent rate.
Before IDBI bank, Union Bank of India, ICICI Bank and Jammu & Kashmir Bank (J&K Bank), have raised their deposit rates. But Union Bank and ICICI bank had raised deposit rates for only one slab, whereas IDBI has raised rates across five slabs.
Last week, J&K Bank had raised deposit rates by up to 75 bps for slabs of one year or more. IDBI Bank said its new updated rates on term deposits will be applicable from February 15.
A senior executive of IDBI Bank said, “This is the right time to raise funds albeit at slightly higher rates, especially in the 500-day bucket, as the liquidity in the system is high. This will help reduce pressure of competition next year, as these deposits would mature in July-August 2011.”
RATE CARD
* In early January, Union Bank introduced new maturity bucket of 555 days offering 6.75 per cent
* Effective January 8, ICICI Bank raised the interest rate on deposits of 270 days to less than one-year maturity by 25 basis points to 5.75 per cent
* On January 29, RBI announced a two-stage hike in CRR by 75-basis points to 5.75 per cent
* Effective February 8, J&K Bank raised rates by 75 basis points for maturity buckets of over 1 year
He added, “The bank’s dependence on market borrowings has been high. Now, we want to grow the base of a stable source of funds over the next three-four years”. The maximum rate being offered by bank is 7.50 per cent on deposits with tenure of 1,100 days, while the on the new slab of 500 days it is offering 7 per cent a year.
A banker pointed out banks are trying to acquire deposits in select maturities, in order to steal a march over the competition before they start raising interest rates as a whole.
Bank has raised deposit rates after the hike of 75-bps rise in the cash reserve ratio, or the proportion of deposits that bank set aside. The CRR is expected to suck out Rs 36,000 crore from the system.
During the second fortnight of January the deposit flow was healthy the banks getting nearly Rs 53,000 crore and the growth during the year till January 29 was 17.09 per cent, marginally low from the Reserve Bank of India’s (RBI’s) projected 18% for the year.
At present other players don’t seem to raise rates, due to low demand for funds. Banks like State Bank of India currently are not planning to do any increase, as it has around Rs 75,000 crore of cash.
Indian Overseas Bank Chairman & Managing Director SA Bhat informed, “There is enough liquidity in the system. Since we are not in a position to raise lending rates due to extreme competition and year-end pressure, I do not propose to increase deposit rates unless the asset-liability committee thinks otherwise.”
Before IDBI bank, Union Bank of India, ICICI Bank and Jammu & Kashmir Bank (J&K Bank), have raised their deposit rates. But Union Bank and ICICI bank had raised deposit rates for only one slab, whereas IDBI has raised rates across five slabs.
Last week, J&K Bank had raised deposit rates by up to 75 bps for slabs of one year or more. IDBI Bank said its new updated rates on term deposits will be applicable from February 15.
A senior executive of IDBI Bank said, “This is the right time to raise funds albeit at slightly higher rates, especially in the 500-day bucket, as the liquidity in the system is high. This will help reduce pressure of competition next year, as these deposits would mature in July-August 2011.”
RATE CARD
* In early January, Union Bank introduced new maturity bucket of 555 days offering 6.75 per cent
* Effective January 8, ICICI Bank raised the interest rate on deposits of 270 days to less than one-year maturity by 25 basis points to 5.75 per cent
* On January 29, RBI announced a two-stage hike in CRR by 75-basis points to 5.75 per cent
* Effective February 8, J&K Bank raised rates by 75 basis points for maturity buckets of over 1 year
He added, “The bank’s dependence on market borrowings has been high. Now, we want to grow the base of a stable source of funds over the next three-four years”. The maximum rate being offered by bank is 7.50 per cent on deposits with tenure of 1,100 days, while the on the new slab of 500 days it is offering 7 per cent a year.
A banker pointed out banks are trying to acquire deposits in select maturities, in order to steal a march over the competition before they start raising interest rates as a whole.
Bank has raised deposit rates after the hike of 75-bps rise in the cash reserve ratio, or the proportion of deposits that bank set aside. The CRR is expected to suck out Rs 36,000 crore from the system.
During the second fortnight of January the deposit flow was healthy the banks getting nearly Rs 53,000 crore and the growth during the year till January 29 was 17.09 per cent, marginally low from the Reserve Bank of India’s (RBI’s) projected 18% for the year.
At present other players don’t seem to raise rates, due to low demand for funds. Banks like State Bank of India currently are not planning to do any increase, as it has around Rs 75,000 crore of cash.
Indian Overseas Bank Chairman & Managing Director SA Bhat informed, “There is enough liquidity in the system. Since we are not in a position to raise lending rates due to extreme competition and year-end pressure, I do not propose to increase deposit rates unless the asset-liability committee thinks otherwise.”
Tuesday, February 9, 2010
All about flexi bank account
On the banks website under deposit schemes you must have come across flexi bank account or must have heard some where, but what exactly flexi bank account is?
Banks have introduced a new banking account- flexi bank account under this they offer higher interest of a fixed deposit and the liquidity of a savings account. Under flexi account you can set your cash limits on the basis of your regular cash requirements and transfer the remaining amount to your term deposit and earn higher interest. During the opening of this account in the form once you have set the rules, the bank will do it automatically.
For instance, you have opened a flexi account of Rs 100,000 for a year, thus your flexi deposit of Rs 70,000, transferred to fixed deposit will earn 5% interest or Rs 3500 every year. The remaining amount of Rs 30,000 will remain in your savings account which you can use to meet your everyday needs as well as earn 3.5 per cent interest or Rs 1,050.
In case you issue a cheque of Rs 35,000 the excess amount of Rs 5,000 it would be transferred into your savings account from your flexi deposits with no extra charge on it depending on your bank terms.
Although some of the banks have different types of flexi bank accounts each having its own rules about the same. Generally there are two types – flexi fixed deposit account and sweep account.
Flexi FD
With flexi FD you can withdraw funds whenever you require. You can open a fixed deposit account ranging between Rs 25,000 to Rs 50,000 for a specific term depending on your bank. Some banks give option of zero balance savings accounts for a higher FD amount.
In case you require more cash than what you have in your savings account then you get the benefit of flexi FD. In such situation your bank will withdraw the excess required amount from your flexi FD and deposit it in your savings account. If you have more than one FD then the bank works on ‘First In, First Out' or FIFO basis thus breaking the first FD opened.
Every bank has their own rules regarding flexi FD schemes. For instance if you have opened a flexi FD account with IDBI Bank or ABN AMRO these banks will split FD into units of Rs 1,000. In case, you want to withdraw Rs 16,200 these banks will transfer Rs 17,000 from your flexi FD into your savings account.
Whereas the HDFC bank splits FD into units of Re 1 thus transfer only the exact amount you need and the rest will remain balance in your flexi FD to continue to earn interest as per the bank’s rate.
Sweep account
Sweep account also known as savings plus account is the reversal of a flexi FD. You should open a savings account in which you fix a minimum limit and the balance that exceeds this limit will automatically be transferred into your FD.
In ICICI bank sweep account you have to maintain a minimum balance of Rs 10,000 in your saving account and the excess amount will be transferred to your FD in multiples of Rs 5,000. While in State Bank of India in sweep account with a minimum of Rs. 10,000 a new FD is created whenever there is a transfer of money over and above Rs 10,000. in Canara Bank the minimum limit in sweep facility is of Rs 15,000.
Advantages and disadvantages of these accounts
In flexi FD account you can enjoy benefits of both savings as well as fixed deposit i.e. higher interest of fixed deposit and liquidity of savings account.
But it also has a drawback. You can enjoy the benefits for only a short term, because the tenure of these accounts is of one year only as its main aim is to give you liquidity and higher interest.
Most of the banks charge the penalty, if customers do not maintain minimum limit in their savings account. There is also a pre-closure charge in case customer closes these accounts before the tenure.
In flexi FD reverse sweep facility is not allowed that is the funds from your savings account cannot be transferred into your flexi FD. In sweep account reverse sweep is allowed.
Also there is a set limit for overdraft and you can keep money in your account for a minimum number of months only. Therefore, investing in these accounts means you invest your money in one place and there is no diversification of your portfolio.
Which account is better?
If you want that to earn higher interest on your money in savings account then flexi scheme might be helpful. However, when you opt to open any of these accounts you must carefully analyze your financial requirements to set the minimum limit as you can be penalized for falling below the predetermined levels or pre-closing of accounts. The decline in interest rates of fixed deposits should also be taken into consideration while opening an account.
Banks have introduced a new banking account- flexi bank account under this they offer higher interest of a fixed deposit and the liquidity of a savings account. Under flexi account you can set your cash limits on the basis of your regular cash requirements and transfer the remaining amount to your term deposit and earn higher interest. During the opening of this account in the form once you have set the rules, the bank will do it automatically.
For instance, you have opened a flexi account of Rs 100,000 for a year, thus your flexi deposit of Rs 70,000, transferred to fixed deposit will earn 5% interest or Rs 3500 every year. The remaining amount of Rs 30,000 will remain in your savings account which you can use to meet your everyday needs as well as earn 3.5 per cent interest or Rs 1,050.
In case you issue a cheque of Rs 35,000 the excess amount of Rs 5,000 it would be transferred into your savings account from your flexi deposits with no extra charge on it depending on your bank terms.
Although some of the banks have different types of flexi bank accounts each having its own rules about the same. Generally there are two types – flexi fixed deposit account and sweep account.
Flexi FD
With flexi FD you can withdraw funds whenever you require. You can open a fixed deposit account ranging between Rs 25,000 to Rs 50,000 for a specific term depending on your bank. Some banks give option of zero balance savings accounts for a higher FD amount.
In case you require more cash than what you have in your savings account then you get the benefit of flexi FD. In such situation your bank will withdraw the excess required amount from your flexi FD and deposit it in your savings account. If you have more than one FD then the bank works on ‘First In, First Out' or FIFO basis thus breaking the first FD opened.
Every bank has their own rules regarding flexi FD schemes. For instance if you have opened a flexi FD account with IDBI Bank or ABN AMRO these banks will split FD into units of Rs 1,000. In case, you want to withdraw Rs 16,200 these banks will transfer Rs 17,000 from your flexi FD into your savings account.
Whereas the HDFC bank splits FD into units of Re 1 thus transfer only the exact amount you need and the rest will remain balance in your flexi FD to continue to earn interest as per the bank’s rate.
Sweep account
Sweep account also known as savings plus account is the reversal of a flexi FD. You should open a savings account in which you fix a minimum limit and the balance that exceeds this limit will automatically be transferred into your FD.
In ICICI bank sweep account you have to maintain a minimum balance of Rs 10,000 in your saving account and the excess amount will be transferred to your FD in multiples of Rs 5,000. While in State Bank of India in sweep account with a minimum of Rs. 10,000 a new FD is created whenever there is a transfer of money over and above Rs 10,000. in Canara Bank the minimum limit in sweep facility is of Rs 15,000.
Advantages and disadvantages of these accounts
In flexi FD account you can enjoy benefits of both savings as well as fixed deposit i.e. higher interest of fixed deposit and liquidity of savings account.
But it also has a drawback. You can enjoy the benefits for only a short term, because the tenure of these accounts is of one year only as its main aim is to give you liquidity and higher interest.
Most of the banks charge the penalty, if customers do not maintain minimum limit in their savings account. There is also a pre-closure charge in case customer closes these accounts before the tenure.
In flexi FD reverse sweep facility is not allowed that is the funds from your savings account cannot be transferred into your flexi FD. In sweep account reverse sweep is allowed.
Also there is a set limit for overdraft and you can keep money in your account for a minimum number of months only. Therefore, investing in these accounts means you invest your money in one place and there is no diversification of your portfolio.
Which account is better?
If you want that to earn higher interest on your money in savings account then flexi scheme might be helpful. However, when you opt to open any of these accounts you must carefully analyze your financial requirements to set the minimum limit as you can be penalized for falling below the predetermined levels or pre-closing of accounts. The decline in interest rates of fixed deposits should also be taken into consideration while opening an account.
Best investment option for senior citizen to earn regular income
Whether a person is employed or approaching the retirement age, everyone searches for investment avenues which are safe and can offer regular income. Although one can find various schemes of investment but security of money is most important factor.
In 2004 Government of India introduced one such special scheme known as Senior Citizen Savings Scheme or SCSS to cater the financial needs of senior citizens.
However the scheme had become very popular amongst the people, but last year when banks offered high rates on fixed deposits had overshadowed the scheme. But in the past few months the banks are reducing deposit rates due to which senior citizen can go for this scheme.
The only shortfall of the scheme is the interest earned on it is taxable. In case the interest income in a year exceeds Rs 10,000, then the TDS (tax deducted at source) is cut.
Although in the recent amendment the investment of up to Rs 1,00,000 in a year done under this scheme has been exempted under Section 80C of the Income Tax Act.
Here the advantages and disadvantages of the scheme have been discussed to help the senior citizens to compare it with other options available.
Senior citizen, a person who has completed 60 years or above is eligible for the SCSS but there is a provision that a person who has completed 55 years and opted for voluntary or any special retirement scheme, can avail this scheme subject to certain conditions.
The scheme is basically for senior citizens therefore it has some special features.
1. The scheme offers a fixed rate of return at 9% per annum, which is higher than the returns offered on other fixed income instruments like PPF and NSC.
2. The investor gets interest income quarterly. Generally, it is the last working day of every quarter. There is no option of getting interest income yearly or cumulative interest at the time of maturity.
3. The tenure of the scheme is 5 years, but premature withdrawal after a year is permissible which gives the benefit of better liquidity to meet unforeseen expenses. Premature withdrawal involves some cost. In case the deposit account is closed after the first yea, but before the second year, 1.5% of the principal amount is deducted otherwise 1% of the principal amount is charged once the scheme completes two years.
4. One gets the option of extending the scheme for another three years on maturity at the prevailing interest rate at that time.
5. The minimum amount of investment is Rs 1,000 while the maximum investment can be Rs 15 lakh. The investment has to be made in multiples of Rs 1000.
6. One also gets the option of opening more than one account, but the new account can be opened after a one month gap. The account can be opened in an individual’s name or can be opened jointly with spouse. Joint account with any other family member or relative is not allowed. Although one can open more than one account but there is the cumulative investment limit has been set to Rs 15 lakh.
There is one perception among the people that it can be opened only with post office but it is not so. Few of the designated branches of nationalized banks and the ICICI bank are authorized to receive deposits under the scheme.
Looking at the above points the scheme looks fruitful but is it really worth investing in this scheme. To get the answer we need to compare this scheme with other investment avenues having similar features.
A bank fixed deposit features are some what same. At present banks are offering interest rates in the range of 7-7.5%. But the nationalized banks and some of the private banks offer additional interest benefit to senior citizens in the form of 25-50 basis points higher. Therefore the interest rate offered on fixed deposit can range of 7.25-8%, but this is less than 9% offered on SCSS. Thus the SCSS is a bit more profitable than bank fixed deposits.
Let us compare SCSS with MIS (Monthly Income Scheme) offered by post offices in India, having same features. Under MIS the fixed rate of return is 8%.
The interest in MIS is paid monthly and the tenure is six years. In this comparison we consider the returns under SCSS over six years.
For instance Mr A deposits Rs 1,00,000 under SCSS, while Mr B invests Rs 1,00,000 with the post office under MIS.
Mr A will receive Rs 2,250 every quarter till the end of the sixth year and the principal amount will be Rs 1,00,000 which he will get back on maturity. Thus the total interest payout over 6 years will be around Rs 54,000.
While Mr B will get around Rs 660 every month, which comes to Rs 2,000 every quarter till the end of sixth year, which stands to be Rs 250 less than the quarterly receipts under SCSS. But under MIS a bonus of 5% on principal amount is paid at the time of maturity. Therefore Mr B will be receiving Rs 1,00,000 along with Rs 5,000 as bonus at the end of sixth year.
Thus the total profit Mr B earns over six years amounts to Rs 53,000. However in terms of total profit earned under MIS or under SCSS over the tenure, there is not much difference. But in case once money requirement increases periodically then the SCSS is a better option as the investor gets more money in the hand every quarter.
Looking at the above points and comparison one reaches to a conclusion that senior citizens must invest a portion of their retirement corpus in the Senior Citizen Savings Scheme as they will get everything – safety, liquidity and regular periodic income under this scheme.
In 2004 Government of India introduced one such special scheme known as Senior Citizen Savings Scheme or SCSS to cater the financial needs of senior citizens.
However the scheme had become very popular amongst the people, but last year when banks offered high rates on fixed deposits had overshadowed the scheme. But in the past few months the banks are reducing deposit rates due to which senior citizen can go for this scheme.
The only shortfall of the scheme is the interest earned on it is taxable. In case the interest income in a year exceeds Rs 10,000, then the TDS (tax deducted at source) is cut.
Although in the recent amendment the investment of up to Rs 1,00,000 in a year done under this scheme has been exempted under Section 80C of the Income Tax Act.
Here the advantages and disadvantages of the scheme have been discussed to help the senior citizens to compare it with other options available.
Senior citizen, a person who has completed 60 years or above is eligible for the SCSS but there is a provision that a person who has completed 55 years and opted for voluntary or any special retirement scheme, can avail this scheme subject to certain conditions.
The scheme is basically for senior citizens therefore it has some special features.
1. The scheme offers a fixed rate of return at 9% per annum, which is higher than the returns offered on other fixed income instruments like PPF and NSC.
2. The investor gets interest income quarterly. Generally, it is the last working day of every quarter. There is no option of getting interest income yearly or cumulative interest at the time of maturity.
3. The tenure of the scheme is 5 years, but premature withdrawal after a year is permissible which gives the benefit of better liquidity to meet unforeseen expenses. Premature withdrawal involves some cost. In case the deposit account is closed after the first yea, but before the second year, 1.5% of the principal amount is deducted otherwise 1% of the principal amount is charged once the scheme completes two years.
4. One gets the option of extending the scheme for another three years on maturity at the prevailing interest rate at that time.
5. The minimum amount of investment is Rs 1,000 while the maximum investment can be Rs 15 lakh. The investment has to be made in multiples of Rs 1000.
6. One also gets the option of opening more than one account, but the new account can be opened after a one month gap. The account can be opened in an individual’s name or can be opened jointly with spouse. Joint account with any other family member or relative is not allowed. Although one can open more than one account but there is the cumulative investment limit has been set to Rs 15 lakh.
There is one perception among the people that it can be opened only with post office but it is not so. Few of the designated branches of nationalized banks and the ICICI bank are authorized to receive deposits under the scheme.
Looking at the above points the scheme looks fruitful but is it really worth investing in this scheme. To get the answer we need to compare this scheme with other investment avenues having similar features.
A bank fixed deposit features are some what same. At present banks are offering interest rates in the range of 7-7.5%. But the nationalized banks and some of the private banks offer additional interest benefit to senior citizens in the form of 25-50 basis points higher. Therefore the interest rate offered on fixed deposit can range of 7.25-8%, but this is less than 9% offered on SCSS. Thus the SCSS is a bit more profitable than bank fixed deposits.
Let us compare SCSS with MIS (Monthly Income Scheme) offered by post offices in India, having same features. Under MIS the fixed rate of return is 8%.
The interest in MIS is paid monthly and the tenure is six years. In this comparison we consider the returns under SCSS over six years.
For instance Mr A deposits Rs 1,00,000 under SCSS, while Mr B invests Rs 1,00,000 with the post office under MIS.
Mr A will receive Rs 2,250 every quarter till the end of the sixth year and the principal amount will be Rs 1,00,000 which he will get back on maturity. Thus the total interest payout over 6 years will be around Rs 54,000.
While Mr B will get around Rs 660 every month, which comes to Rs 2,000 every quarter till the end of sixth year, which stands to be Rs 250 less than the quarterly receipts under SCSS. But under MIS a bonus of 5% on principal amount is paid at the time of maturity. Therefore Mr B will be receiving Rs 1,00,000 along with Rs 5,000 as bonus at the end of sixth year.
Thus the total profit Mr B earns over six years amounts to Rs 53,000. However in terms of total profit earned under MIS or under SCSS over the tenure, there is not much difference. But in case once money requirement increases periodically then the SCSS is a better option as the investor gets more money in the hand every quarter.
Looking at the above points and comparison one reaches to a conclusion that senior citizens must invest a portion of their retirement corpus in the Senior Citizen Savings Scheme as they will get everything – safety, liquidity and regular periodic income under this scheme.
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