Utilise enhanced SCSS limit, but diversify your retirement corpus

Money should also be invested in instruments that offer growth, longer lock-in, and liquidity

The Senior Citizens Savings Scheme (SCSS) garnered more than Rs 10,000 crore in April 2023. Two factors account for its rising popularity -- this year’s Budget hiked the investment limit in this product from Rs 15 lakh to Rs 30 lakh and the government also raised the interest rate on SCSS from 8 per cent to 8.2 per cent for the April-June quarter.

Tailor-made for senior citizens

SCSS is a simple and safe product. “Being government-backed, it is risk-free,” says Arvind A Rao, certified financial planner and founder, Arvind Rao and Associates. The interest rate of 8.2 per cent is very attractive for a risk-free product.

“The return on some post office products can be below that offered by bank fixed deposits (FDs), but in the case of SCSS it is always more than or equal to bank FD returns,” says Rao.

The benchmark repo rate is currently at or near the peak of the interest-rate cycle. It is likely to remain stable at these levels and then decline. “By entering the scheme now, investors can lock into the current high rate of interest for five years,” says Rao.      

The scheme makes quarterly payouts. “It meets senior citizens’ need for a regular income stream after retirement,” says Arnav Pandya, founder, Moneyeduschool.

The investment limit has risen from Rs 15 lakh per individual to Rs 30 lakh. The annual interest rate on the latter amount is Rs 2.46 lakh. A senior citizen’s spouse can invest another Rs 30 lakh. “Altogether, a senior citizen couple can potentially earn an annual interest income of Rs 4.92 lakh from this scheme,” says Deepesh Raghaw, a Securities and Exchange Board of India or Sebi-registered investment advisor (RIA) and founder, PersonalFinancePlan.

Pandya points out that after the scheme’s five-year tenure gets over, it can be extended once by another three years. The rate of interest paid during extension is the rate prevalent on the date of maturity.

Reinvestment risk

SCSS allows senior citizens to lock in the rate of interest for five years only. Investors in this scheme are hence subject to reinvestment risk. If the rate of interest is lower at the time of maturity, senior citizens could be forced to reinvest at a lower rate.

The interest income from SCSS is taxable at the individual’s slab rate.  

Also, SCSS doesn’t offer a cumulative option. Interest gets compulsorily paid out every quarter. “Investors who don’t need the cash payouts lose out on the compounding benefit,” says Rao.  

Premature exit from SCSS leads to a penalty (which reduces with the passage of time). “Investors need to commit their money into this scheme for a long horizon,” says Pandya.

Who should go for it?

According to Pandya, most senior citizens should go for SCSS since it is one of the highest interest-paying options available to them.

“Only senior citizens who don’t have an income requirement, because it is met by their pension or some other source, may avoid it. People in the highest tax brackets may also want to stay away from it,” says Raghaw.

Those who need to invest in growth-oriented products may also avoid this scheme. “Many people, in fact, invest in SCSS, knowing that their principal will be safe there, then invest the interest income they get from it into risky instruments for growth,” says Rao.

Diversify your retirement corpus

Senior citizens should avoid putting their entire retirement corpus in SCSS. “Some part of the corpus should also be used to lock in interest rates for a longer period — 20-30 years, or even for lifetime — using products such as bank FDs, government bonds, and annuities,” says Raghaw.

Interest rates on SCSS get reset every quarter. But don’t assume that your rate of interest will also rise or fall alongside. “The rate of interest at the time of entry will apply throughout the tenure,” says Rao.

More fixed-income options for retirement portfolio

• Bank fixed deposit: Simple and easy option. Senior citizens get a higher rate of interest. Deduction of up to Rs 50,000 on interest income
• Immediate annuity: Allows investors to lock in rate of return for life. Rate of return is lower but improves with age  
• Government bonds: Can lock in rate of interest for 20-30 years, liquidity can be an issue
• Post office monthly income scheme: Sovereign-backed, interest rate lower at 7.4 per cent
• GoI floating-rate bonds: Interest rate is 35 basis points above National Savings Certificate, no limit on investment, but interest rate fluctuates throughout tenure
• Debt mutual funds: Market-linked returns. Returns come in the form of capital gains, so investors can decide when to book gains and thereby defer tax liability