Apart from the regular interest rate announcements every quarter, which is eagerly awaited by investors, small savings schemes have been in the news for other reasons in 2023. Of this, doubling of the permissible investment in Senior Citizens’ Savings Scheme (SCSS) to ₹30 lakh, increasing the investment limit in the post office Monthly Income Scheme (MIS) for single ( ₹4.5 lakh to ₹9 lakh) and joint accounts (₹9 lakh to ₹15 lakh) and the introduction of the Mahlia Samman Savings Certificate – all measures announced in Budget 2023 – are well-known.
However, there are other subtle but important changes made to some of the schemes this year. One set of these tweaks were announced earlier in July 2023 and the next, recently, in the first week of November. Here’s a low down what it all means for investors.
Batting for the long term
This year, rules have been tweaked to primarily ensure the benefits of long-term investment in at least three schemes — the Public Provident Fund (PPF), SCSS and the 5-year Post Office time deposits. This has been done by making some changes to rules on early closure.
Earlier, withdrawals from 5-year deposits were allowed even after one year from the date of deposit ; interest payable in such cases would be two percentage points lower than that of 1, 2 or 3-year deposits (depending on the year of withdrawal). A closure after 4 years would fetch interest rates applicable for a 3-year deposit. Now, 5-year deposits can be closed only after four years and not earlier. And even this closure will earn interest equivalent only to a post office savings account. For perspective, today, while 5-year deposits earn 7.5 per cent, 1, 2 and 3-year deposits give 6.9–7 per cent. However, the interest on an SB account is only 4 per cent.
In the PPF, which has a 15-year tenure, for an early withdrawal or closure, interest paid is usually one percentage point lower than what has been credited from time to time. This penalty is being charged from the date of account opening (in case it is held for 15 years or less) or from the date of extension ( for accounts over 15 years, which can be extended in blocks of 5 years).
Now, say, an account is in 13th year when it is closed. Penalty will be charged from the very first year; Alternately, assume closure is in the 23rd year. Under the rule citied above, penalty could be charged from, say, the 15th/16th year, which is the year of extension. Recent changes relax this penalty. It is now allowed to be charged from the ‘date of commencement of the current block of 5 years’. So, the penalty could be charged only from the 20th/21st year instead. Net-net, the idea is — longer the tenure, lower the penalty. Investors who withdraw within the 15-year period suffer the most even now, while the recent move will help preserve the corpus built over a period of more than 15 years better than the earlier rule.
The SCSS runs for 5 years and like other instruments, has penalties for early withdrawal at various points during the tenure. This scheme allows extension for three years after maturity (recently changed to blocks of 3 years). Under the earlier rule, a closure one year after extension was allowed and no penalty was charged. Now, the good news is that a closure before one year is allowed. But the bad news is that 1 per cent of the deposit will be deducted as penalty before payout. A grey area here, though, is that if seniors continue extending their investment in blocks of three years, it needs to be seen whether this penalty is applicable for closure in the first year in every three-year block.
Investors in all these three schemes who choose the old tax regime need to keep another point in mind. Apart from tweaks that lower or heighten the penalties for you, any deduction claimed under Sec 80C for investments will also stand reversed. Hence, there is the additional tax outgo to consider too, when mulling early closure/withdrawals.
Worried over the tightening noose? Fret not. There are quite a few relaxations to make you smile too. In the SCSS itself, moves such as the unlimited extension in blocks of 3 years and the allowing of spouse of a deceased government employee to open an account under certain circumstances have been in the limelight since they were announced earlier this month.
There are three other lesser-known changes aimed at smoothening succession. One, NRIs can be nominees in small savings schemes. This comes as a big relief for senior citizens and other risk-averse investors who park their savings in the post office, if their legal heirs are abroad. However, note that payments made to nominees will be on a ‘non-repatriation basis’, ie cannot be taken abroad.
Two, those who hold joint accounts can breathe easy as these can be converted to single accounts on demise of a joint account holder. Earlier, conversion from joint to single and vice-versa was not allowed, sometimes resulting in single surviving account holders having to withdraw or open a new account. What if there is no nominee and a dispute arises over sums lying in a deceased person’s account ? A modus operandi for handling such cases has been provided now. Among other things, a succession certificate issued by the Court is what the post office would go by from now on, to decide whom to pay out to.