How good is the senior citizen savings scheme

The five-year Senior Citizen Savings Scheme (SCSS), which was launched in the second half of 2004, was quite a hit because it offered higher returns.

Many investors who invested in the initial time period would find their schemes maturing now or in the coming days. Obviously, it is important to take a relook at these schemes from the investor's perspective.

The main question to ask: Should they reinvest in these schemes or cash out. Also, once they have taken out the money, what should they do with it? 

The rate of return earned on this scheme is 9 per cent, which is quite high, considering the existing rates. This return is paid to the investor every quarter. Given the high rate, it would be quite difficult for senior citizens to get a similar rate from other instruments.

For example, bank fixed deposit rates at the longer end of the maturity period are in the range of 7-7.5 per cent. A good choice, therefore, will be to continue the same instrument.

However, there would a slight difference: While the initial investment was possible for a period of five years, the period of extension can only be done for three years. And this extension can be achieved by filling a form in the respective bank or post office where the investment has been done.

There are other benefits as well. While high returns and safety is one aspect, there is also a tax benefit. Investments up to Rs 1 lakh in the scheme are eligible for a deduction under section 80C of the Income Tax Act.

However, there is no mention of this benefit - whether it will continue or not - under the revised Direct Tax Code. Investors need to take a call quickly if they want to continue getting the tax advantage.

Senior citizens who are especially 65 years and above should ensure that they are able to invest the maximum possible amount in this instrument.  This is because they come in the highest tax bracket and, if the returns from this instrument do not exceed their basic exemption limit of Rs 2.4 lakh, they stand to earn tax-free returns.

While the positives are many, there is one major negative. These instruments lack liquidity.

Investors in these instruments cannot move in and out, as and when they wish to - a big negative if one considers that during old age, citizens may need sudden influx of cash for medical or other needs.  Also, these investments cannot be transferred.

There are fewer instruments that provide protection as well as high returns for individuals. So till the initial Rs 15 lakh limit per person is utilised by the individual, this is a good choice.

For people, who have a higher amount of corpus, this instrument would be inadequate, both for the purpose of investing and, thereby generating higher returns.

Other debt options have some point or the other which makes a choice difficult for the senior citizen. For example those that have a regular return like the monthly income scheme of the post office have a maximum investment limit of Rs 4.5 lakh for a single individual.

In addition, a monthly income plan of a mutual fund will not guarantee any return. In some months, if the conditions are not favourable, there might not even be any payout. Other bonds and debentures will not ensure a regular cash flow that meets a senior citizen's needs.

Looking at these alternatives, SCSS provides a regular return flow that is quite high by existing market standards. At the same time, it provides a decent limit for senior citizens to park their funds.