A senior citizen invested Rs 15 lakh in the SCSS account in January 2022 at a 7.4% interest rate. He has been receiving quarterly interest of Rs 27,750 since opening the account and so far he has earned Rs 1,38,750 (Rs 27750×5) as interest.
Now that the Government has increased the SCSS interest rate to 8.2%, he wants to close the old account and start a new one. If he closes the account then 1.5% of the principal amount i.e. Rs 22,500 will be charged as a premature closure penalty (check rules) but his net benefit in the course of the next five years will be Rs 37,500. Should he close the old account and open a new one?
Experts say that senior citizens can take benefit from the higher interest rate by closing the previous account opened at a lower rate if the gains from premature closure are higher.
“Since the senior citizen has already completed one year, the penalty for premature withdrawal from his SCSS deposit will only be 1.50% of the deposit amount. Since the gain from prematurely withdrawing the deposit and making fresh deposit is significantly higher, it makes sense to close the old account and open a fresh account,” says Balwant Jain, tax and investment expert.
Bharat Phatak, Director of Scripbox, also says, “The senior citizen can prematurely withdraw SCSS after completion of 1 year. The penalty will be 1.50% of the deposit for withdrawal made after expiry of 1 year but before expiry of 2 years from date of deposit. The old account is at 7.40%, and the new one will earn interest at 8.20%. At an additional interest of 0.80%, the senior citizen will recover the penalty in less than 2 years .”
What if the senior citizen availed tax-benefit?
Deposits up to Rs 1.5 lakh in the SCSS account qualify for tax deduction under Section 80C of the Income Tax Act 1961. If the senior citizen has already claimed the tax deduction, he may then leave the Rs 1.5 lakh in the old account and withdraw the balance amount to open the new account, according to experts.
“In case the senior citizen had availed tax benefit under Section 80 C in respect of these deposits the same shall be treated as his income of this year. To avoid this reversal of tax benefits availed earlier, he can retain Rs 1.50 lakh under the old account and withdraw only Rs 13.50 lakh,” says Jain.
SCSS Interest Rate Since 2020
The Senior Citizen Savings Scheme (SCSS) account interest rate between September 2020 and December 2022 was 7.4%. It was revised to 8% between 01-10-2022 and 31-03-2023. For the current quarter (April-March 2023), the SCSS interest rate has been fixed at 8.2%.
SCSS Premature Closure Penalty
As per SCSS rules, the account can be closed at any time before the 5-year maturity period. But there are certain penalties for premature closure that will have to be paid. For instance,
- If you are closing the account before completion of 1 year from the date of opening the account, no interest will be paid. Moreover, any interest already paid will be recovered from the principal.
- If you are closing the account after 1 year but before 2 years from the date of opening, an amount equal to 1.5 % of the principal will be deducted.
- If you are closing the account after 2 years but before 5 years from the date of opening, an amount equal to 1% of the principal will be deducted.
While the SCSS account matures in 5 years, it can be extended for another 3 years. The extended account can be closed after the expiry of one year from the date of extension of the account without any deduction.
The deposit limit under SCSS has also been increased to Rs 30 lakh for a single account holder from FY 2023-24.