Major relief for senior citizens as SBI offers 80 bps more on FDs

SBI's new product offers good rates but SCSS and RBI's savings bonds are more attractive

In a falling interest rate regime, senior citizens are hit the most as they rely on their fixed deposits (FD) for extra income. So, the country’s largest bank, State Bank of India’s decision to give whopping 80 basis points (bps) more for long-term FDs should be welcome news.

However, financial planners say that besides looking for a higher rate, senior citizens have other needs. “While deciding between the two instruments, you need to compare several parameters like the rate, liquidity, and tax efficiency, as well as the upper limit,” says Kiran Telang, founder, Dhanayush Capital Advisors.

For deposits below Rs 2 crore for five to 10 years, the interest rate on offer is 5.7 per cent. Senior citizens will be able to get 6.5 per cent a year. Usually, the difference between SBI’s products for senior citizens is 50 bps. 

However, the “Wecare Deposit” will give an additional 30 bps for deposits of five or more years. Adds Telang: “The question is whether you will be able to beat inflation with this rate of return.”

There are other instruments that are offering better rates. For example, the senior citizen savings’ scheme (SCSS) offers 7.4 per cent a year. This rate is reviewed quarterly and is subject to periodic change. From an interest rate point of view, SCSS looks certainly better than a five-year FD. 

 

 

Telang says: “The rate does look attractive because there is overall panic in the market. The interest rate scenario will change in five years. This Covid-crisis and its repercussions are unlikely to last for those many years. So, ask yourself if locking the money at 6.5 per cent interest for five years is worth giving up the liquidity.”

The issue is liquidity. The Wecare FD is available for a minimum of five years as does SCSS. However, the interest paid on SCSS account deposits is calculated and credited quarterly. So, there is some liquidity in hand regularly. 

However, Abhinav Angirish, founder, Investonline.in argues that SCSS offers interest liquidity, but does not offer ‘principal amount’ liquidity. “One must remember that typically senior citizens do not withdraw money before maturity,” he adds.

As far as taxation goes, Gopal Bohra, partner, NA Shah Associates LLP, says: “The interest income earned by senior citizen whether from SCSS or SBI Wecare or regular bank deposit is taxable. However, such interest income qualifies for deduction up to Rs 50,000 under Section 80TTB from the taxable income.” Investments made in an SCSS account qualify for income tax deduction benefit up to Rs 1.5 lakh under Section 80C.

SCSS comes with an upper limit of Rs 15 lakh whereas SBI’s FD is below Rs 2 crore. “In case the liquidity is not required for next five years, the surplus funds exceeding Rs 15 lakh may be deposited into the SBI Wecare deposit which gives 80 bps additional interest and if liquidity is required, the surplus can be deposited in regular deposits which give 50 bps additional interest,“ says Bohra. 

Telang concurs with Bohra adding that where liquidity is not required SCSS is a better option than SBI FD.” In fact, there are other FDs which offer equally mouth-watering rates for senior citizens (see box). Angrish says: “RBI savings bonds still offer 7.75 per cent return with high safety, so they too are good options for senior citizens.”