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Should You Continue With Your Existing SCSS Or Withdraw And Reinvest At A Higher Rate?

The rate of interest on the Senior Citizen Saving Scheme has been increased to 8.2 per cent effective April 1, 2023. Also, the limit for maximum investment has been enhanced to Rs 30 lakh from this financial year. So, should you continue with your existing investment or withdraw and reinvest? 

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Versha Jain
April 18, 2023
Should You Continue With Your Existing SCSS Or Withdraw And Reinvest At A Higher Rate?

The government has increased the rate of interest on Senior Citizen Savings Scheme (SCSS) to 8.2 per cent for the first quarter of financial year 2024, i.e., April-June 2023, up from 8 per cent in the January-March quarter of 2023.

The SCSS is meant for people above 60 years of age and offers them a dependable regular income.

SCSS has historically been offering decent returns. The rate of interest in this scheme had not gone below 8 per cent in the last 10 years. However, in 2020, the year of the pandemic, the rate of interest in the scheme went down to its 10-year lowest to 7.4 per cent, and has remained so for over two years, from April 1, 2020 to September 30, 2022.

If you had invested in SCSS in these years, when the rate of interest was 7.4 per cent, you may be wondering if it makes sense to withdraw and reinvest at the latest higher rate.

Assuming a maximum investment of Rs 15 lakh in April 2022, the interest in one year comes to Rs 1.11 lakh. You would receive the same amount every year for the full five-year term. Over five years, you would receive Rs. 5.55 lakh as interest in total.

If you had invested Rs 15 lakh in April 2021, then also you would have received the same interest of Rs 1.11 lakh per annum over five years.

But now, with the recent increase in interest rate to 8.2 per cent, you will earn Rs 1.23 lakh per annum on Rs 15 lakh, and in five years, this will come to Rs 6.15 lakh in interest. That’s a huge difference of Rs. 60,000 over five years.

So, investing at this higher rate looks right. However, there is something to be mindful of. The scheme has a lock-in period of five years and charges a penalty for premature withdrawal.

So, if you plan to withdraw prematurely from the existing SCSS and deposit again to take advantage of the higher rate, what would you get?

If you withdraw after one year, the penalty is 1.5 per cent on the deposit, and after two years to less than five years, the penalty is 1 per cent.

Also, one must not forget that a withdrawal within one year brings zero return to the investor.

Deposit At Higher Rate After Withdrawal From Existing SCSS

A withdrawal within one year would mean a loss of one-year interest income of Rs 1.11 lakh and re-depositing Rs 15 lakh would mean an extra Rs. 63,000 for the investor over the next five years, at the current 8.2 per cent rate of interest. On the enhanced investment limit of Rs 30 lakh, effective April 1, 2023, the interest would be Rs 2.46 lakh per year and Rs. 12.30 lakh in five years.

Withdrawal after one year will mean a penalty of Rs 22,500, and after two but less than five years, it would be Rs 15,000, assuming a deposit amount of Rs 15 lakh.

In a nutshell, it’s best to evaluate investment in SCSS in relation to the time period of investment, i.e., one should remain invested for at least one year and, if getting a higher interest rate, withdraw and deposit again.

From April 1, 2023 onwards, the investment limit in the scheme has also been increased to Rs. 30 lakh. So, the elderly can make the most of the scheme by investing in it to the maximum and be assured of a safe and higher regular income every quarter.

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