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The first priority of every senior citizen after retirement is to completely protect his life savings and get regular, fixed income from it. In the Indian financial market, Fixed Deposit i.e. Bank FD has been the first choice of the elderly for decades, while the Senior Citizen Savings Scheme run by the Central Government has also become very popular due to consistently strong returns and government guarantee. In the current interest rate era, the most common question in the minds of investors aged 60 years and above is whether they should invest their money in bank FD or in SCSS available in post offices and authorized banks. Both the schemes are low-risk options, but there is a big difference in their terms, liquidity, payment cycle and final returns.
Direct comparison of interest rates and government securities
The Senior Citizens Savings Scheme is directly backed by the Government of India, so there is no credit risk or risk of default. At present the government is providing interest on this scheme at the rate of 8.20 percent per annum, which is reviewed every quarter by the Finance Ministry. On the other hand, major government and private banks of the country are offering interest ranging from about 7.00 percent to 7.75 percent on 5 year FD to senior citizens. In bank FD, the principal and interest amount of the depositor up to Rs 5 lakh remains protected under DICGC rules. Thus, both are strong in terms of security, but in terms of interest rates the government scheme has a clear lead.
Interest payment terms and cash flow pattern
To manage regular expenses, it is important to know when and how interest is paid. In Senior Citizen Savings Scheme, interest is paid only on quarterly basis i.e. every three months on 1st January, 1st April, 1st July and 1st October directly into the savings account of the investor. In this, the option of taking lump sum money on maturity along with cumulative i.e. compounding is not available. In contrast, investors get immense flexibility in bank FD. Investors in bank FD can take interest as per their convenience like a monthly pension, choose payment on quarterly basis or choose the cumulative option and get the entire amount compounded on maturity and in lump sum.
Strict rules regarding investment limit and time period
A person can invest only up to a maximum of Rs 30 lakh in the Senior Citizens Savings Scheme. If both husband and wife are above 60 years, then they can invest Rs 30 lakh each separately or jointly i.e. a total of Rs 60 lakh. The lock-in period of this scheme is 5 years, which can be extended in blocks of 3 years after maturity. On the other hand, there is no maximum limit for investment in bank fixed deposits, investors can invest Rs 50 lakh, Rs 1 crore or more in different banks as per their wish and financial capacity. The tenure of bank FD can be chosen as per your need from minimum of 7 days to 10 years.
Complete mathematics of return on investment of ₹15 lakh
If a senior citizen invests a lump sum amount of Rs 15 lakh for a period of 5 years, the difference in income between the two modes can be clearly seen. At a rate of 8.20 per cent in SCSS, the investor gets a fixed income of around Rs 30,750 every quarter, which comes to Rs 1,23,000 in a year. In this way, the total interest income in the entire tenure of 5 years becomes Rs 6,15,000. On the other hand, if the same Rs 15 lakh is kept in a 5-year FD of a bank at 7.25 percent simple quarterly payment rate, then approximately Rs 27,188 will be received per quarter and Rs 1,08,750 annually. The total interest from FD in 5 years will be Rs 5,43,750. Thus, on Rs 15 lakh, one gets Rs 71,250 more profit directly in the government scheme.
What are the rules of tax exemption and TDS
There are some similarities and some differences between the two schemes from the income tax point of view. Under the old tax regime, tax exemption can be claimed on investments up to Rs 1.5 lakh in both 5-year tax saver bank FD and SCSS under Section 80C. However, this exemption is not applicable in the new tax system. Interest income is taxed at both the places as per the tax slab of the investor. Under Section 80TTB of the Income Tax Act, citizens above 60 years of age get full tax exemption on total interest income (including FD and savings) up to Rs 50,000 in a financial year. If the total interest exceeds Rs 50,000, TDS is deducted by the bank or post office, which can be avoided by filing Form 15H if the total taxable income is zero.
Pre-Mature Withdrawals and Liquidity Position
The rules for withdrawing money in case of emergency are more simple in bank FD. Most banks allow premature break of FD by taking nominal interest deduction or penalty of 0.5 to 1 percent and the money comes into the account immediately. Apart from this, the facility of taking loan up to 90 to 95 percent against bank FD is also available. On the other hand, in SCSS, if money is withdrawn within 1 year of account opening, no interest is earned and the interest paid is deducted from the principal amount. For withdrawal between 1 to 2 years, 1.5 percent of the principal amount is deducted as penalty and for withdrawal after 2 years, 1 percent of the principal amount is deducted, and the facility of bank loan in lieu of this is also not easily available.
Choosing the right strategy for retirement fund
Elderly investors should create a balanced portfolio instead of investing their entire fund in one place. As a first priority, one should invest in SCSS to the maximum limit of Rs 30 lakh to avail the high and guaranteed rate of 8.20 percent. After this, it is a wise decision to invest the remaining extra capital and emergency fund in different bank FDs of 1 to 3 years, so that there is no shortage of regular cash and money can be easily withdrawn when needed.