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Sowmya Sundar

The new savings scheme allows you to earn a higher assured return on a substantial portion of your surplus.

SENIOR citizens do not have to worry much about declining interest rates and deteriorating returns anymore. This is thanks to the Senior Citizens Savings Scheme. The main advantages of the new scheme are the higher investment ceiling and liquidity. On the flip side, the shorter tenure vis-à-vis Varishtha Bima Pension Yojana (Varishtha) exposes one to reinvestment risks.

Liquidity the key

Unlike the Varishtha, the new scheme offers high liquidity benefits. It only requires a minimum one-year lock-in compared to Varishtha's 15. The penalty paid on premature withdrawal is lower than in the Post Office Monthly Income Scheme (POMIS). In POMIS you lose 5 per cent of the deposit if you withdraw before three years. If withdrawn after three years but before maturity, you lose out the 10 per cent bonus which reduces the overall return. In the new scheme you only lose 1 per cent or 1.5 per cent of the deposit amount. For those who may need the funds before three years can consider this savings scheme over POMIS as the returns are better for the new scheme, if you were to surrender.

Covers more people

The scheme also covers the high-income group as against Varishtha that had a much lower investment ceiling. At the maximum limit of Rs 15 lakh, the annual assured cash flow amounts to Rs 1.35 lakh. The Varishtha scheme offered a maximum pension of Rs 24,000 per annum. POMIS has a much lower investment ceiling at Rs 3 lakh. The annual cash flow for a Rs 3-lakh investment will be only Rs 24,000 under the POMIS scheme.

The new savings scheme allows you to earn a higher assured return on a substantial portion of your surplus thus protecting a senior citizen from interest rate risks for a limited period. Only those who have a surplus of more than Rs 18 lakh need to look at avenues outside the two options. The new scheme, thus, benefits people with higher surplus.

Shorter tenure exposes to interest rate risk

The lower tenure for the savings scheme is a disadvantage against the Varishtha wherein pension could be taken throughout your life. But the savings scheme offers assured returns only for a maximum of eight years, thus, exposing you to interest rate fluctuations.

Taxation not an issue

Income from the Senior Citizen's Savings Scheme is fully taxable. But this should not pose problems as income up to Rs 1.5 lakh is already exempt from tax for senior citizens.

Even if a person exhausts the Rs 15-lakh-investment ceiling in the savings scheme, he will not attract any tax liability as the annual income from this investment will be less than Rs 1.5 lakh. If a person invests Rs 15 lakh in savings scheme and further Rs 3 lakh in POMIS, he still will not attract any tax liability, as POMIS is eligible for deduction under section 80 L up to Rs 12000.

Suitability

For those whom liquidity is an important consideration, the savings scheme is a better option than POMIS.

If monthly income is a necessity, then you will have to split your surplus between the two schemes in such a way that you can cover your minimum monthly commitment.

If the entire cash flow received is not to be used, then you can invest a higher portion in POMIS and link it to a post office recurring deposit. This will give you a much higher return.

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