SCSS vs Senior Citizen Fixed Deposit: Check interest rate, tax deduction, eligibility, tenure

Safety of capital, guaranteed interest income and higher interest rates from other depositors make bank fixed deposits (FDs) a preferred investment instrument for senior citizens, especially for retired individuals lacking other sources of income. Another fixed income instrument that has gained significant traction among senior citizens in recent years, especially during the low interest regime of Covid years, is Senior Citizens Saving Scheme (SCSS). The net corpus of this scheme has grown from Rs 73,728 crore in February 2020 to about Rs 1.17 lakh crore in February 2022.

As the interest rate of SCSS continues to beat senior citizen FD rates offered by most banks for the 5-year tenure, here I will compare the various features of SCSS and bank FDs to help you make an optimal choice.

Interest Rate

SCSS offers an interest rate of 8.2% p.a., which is around 50-150 bps higher than FD rates offered by PSU banks and large private sector banks, to senior citizens for 5-year tenure. Only a couple of banks like Suryoday Bank, Unity Bank, DCB Bank and Fincare Bank offer higher FD interest rates for their 5-year tenure. The story remains the same for tax-saving FDs, which too qualify for tax deduction under Section 80C and have a tenure of 5 years or more. Thus, when it comes to interest rates, SCSS clearly beats the FD rates of most banks by a significant margin.

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Tax deduction

Investment in SCSS of up to Rs 1.5 lakh per financial year qualifies for tax deduction under Section 80C. Among the bank FD variants, only the tax saving FDs with a lock-in period of 5 years qualify for tax deduction under Section 80C. The interest income earned from tax saving FDs is taxable as per tax slab of the depositor, subject to the deduction of Rs 50,000 per financial year allowed under Section 80TTB. This deduction can only be availed by senior citizens for interest income earned from deposits, including savings account, RD and FDs, opened with banks, post-office and co-operative banks. SCSS depositors should contact their tax consultants to check whether their interest income from SCSS qualifies for tax deduction under Section 80TTB.

Interest Payout options

The accrued interest income of SCSS is paid out to its investors at quarterly intervals, on the last day of March, June, September, and December. In case of bank FDs, most banks offer quarterly pay-out option, monthly pay-out option and cumulative option to their depositors. Some banks also additionally offer half-yearly and even annual pay-out options to their depositors. Thus, a senior citizen depositor seeking regular interest income from his FDs can select from the various interest payout options whereas those seeking to save for their financial goals can opt for the cumulative option. This allows greater flexibility to the senior citizens for managing their cash flow requirements.

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Capital Protection

Being managed by the Union Ministry of Finance, SCSS depositors are covered under sovereign guarantee, the highest form of income certainty and capital protection available to any depositor in the country. In case of bank FDs opened with scheduled banks, senior citizens are partially covered with quasi-sovereign guarantee through the Depositor Insurance Program of DICGC, an RBI subsidiary. This program covers cumulative bank deposits (including FD, RD, savings account and current account) of up to Rs 5 lakh of each depositor maintained with each scheduled bank, in case of bank failure. Thus, senior citizens should check whether the banks with which they wish to maintain their FDs have been classified as scheduled banks by the RBI. Senior citizens seeking higher capital and income protections for their bank FDs can spread their FDs across multiple scheduled banks in such a way that their cumulative bank deposits with each of those scheduled banks do not cross Rs 5 lakh.

Investment Amount

The maximum investment amount of SCSS has been capped at Rs 30 lakh whereas banks have not capped the maximum FD amount for their depositors, except for the cap of Rs 1.5 lakh on tax saving FDs per financial year. Thus, senior citizens having investible surpluses in excess of Rs 30 lakh would have to consider bank FDs or other investment options to park their excess investible surplus.

Eligibility

The minimum cut-off age for any individual for opening an SCSS account is 60 years. However, individuals retiring before attaining 60 years can also open this account. Retired defence personnel aged 50 years and less than 60 years and other retired employees aged 55 years but less than 60 years can open SCSS accounts provided they open their accounts within 1 month of receiving their retirement benefits. Thus, SCSS allows many retired individuals to earn higher returns on their FD, which is otherwise unavailable to them through bank FDs.

Tenure

SCSS can be availed for 5 years only whereas the tenure of bank FDs ranges between 7 days and 10 years. Thus, bank FDs allow depositors much higher flexibility to select tenures based on the time horizons of their financial goals.  

Senior citizens having an investment horizon of five years, seeking regular income at quarterly intervals and/or wishing to save tax under Section 80C should prefer SCSS due to its higher interest rates. SCSS also allows some retired individuals to avail higher interest rates before reaching the age of 60 years, provided they open their SCSS accounts within a year of receiving their retirement benefits. Other depositors should consider their liquidity requirements, time horizon of their financial goals and risk appetite while choosing between bank FDs and SCSS.

(By Gaurav Aggarwal, Senior Director, Paisabazaar)

Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.