Stop penalty on early withdrawal of SCSS in case of death: IBA to banks

Banks asked to capture closure reason in CBS

Commercial banks were found to be charging penalties for premature withdrawal of deposits even after the death of the account holders, when their kin wanted to withdraw the money.

The Indian Banks’ Association–the industry body for banks–upon noticing banks charging these penalties for the Senior Citizen Savings Scheme (SCSS) in violation of the existing rules, have asked banks to refrain from doing so.

“…we have come across complaint(s) that some banks, while processing settlements/premature payments of accounts to the legal heirs/nominees of deceased depositors under the captioned scheme [SCSS], are treating the same as premature withdrawal and levying penal interest,” the IBA said in a communication to its member banks on Thursday.

Senior Citizens’ Saving Scheme (SCSS) is a government-backed retirement benefits programme under which senior citizens residing in the country can invest up to Rs 15 lakh, and get access to regular income along with tax benefits. An SCSS account can be opened at a bank or a post office. The maturity period for the scheme is five years which can be extended by another three years. The scheme offers an interest rate of 7.4 per cent at present.      

IBA cited the amendment made in a government notification dated July 28, 2010, in Rule 8, sub-rule (3) of the SCSS rules, 2004, which says in case of a death of a depositor before maturity, the account shall be closed and deposits should be refunded to the nominee or legal heirs along with interest as applicable to the scheme till the date on which the depositor expired. The bank body further cited Rule 8, sub-rule (5) of the SCSS rules 2004, which clearly says no deduction shall be made in case of premature closure of an account at any time due to death of a depositor.

“We request all the member banks to be guided by the SCSS rules to avoid any complaints,” the IBA communication said, a copy of which has been reviewed by Business Standard.

The bank body has asked the banks to devise a mechanism to capture the closure reason of such deposits in their Core Banking System (CBS) for seamless processing of such applications received from the customers.

Premature withdrawal is allowed in the SCSS scheme after one year. There is a penalty of 1.5 per cent of the total amount deposited in case withdrawal is made between one and two years. The penalty is one per cent if withdrawal is made after two years. All public sector banks and many private sector banks offer the scheme.