As a New Year gift, the government gave the retirees and senior citizens a rate boost in the senior citizens' savings scheme (SCSS) and the post office monthly scheme. While the SCSS rose from 7.6 per cent to eight per cent, the post office monthly scheme increased from 6.7 to 7.1 per cent. According to financial planners, anything in the range of 7.5 to eight per cent is a favourable rate for senior citizens across fixed deposits (FDs) and small savings schemes (SSS).
Explains Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm: "The government has specifically increased the interest rates of a few small savings schemes, which include the SCSS and Post Office Monthly Income Scheme. It's an indication that it's in the interest of senior citizens as they seek these schemes. The government's move has been to enable senior citizens to cope with the inflationary pressure."
"It is a welcome move for the senior citizens because they may not be able to put a major chunk of their investments in risky assets to earn more returns to tackle taxation and inflation. Having said that, senior citizens may have to look beyond SSS in the long run as these schemes have investment limits. Therefore, a solid retirement plan is necessary to streamline your cash flows out of your retirement kitty," he adds.
Agrees Kiran Telang, a Mumbai-based certified financial planner and author of Mindful Retirement: "SCSS rate is now eight per cent which has not been seen for some time. With a guarantee of income and no credit risk, this scheme is very appealing to senior citizens. Most banks have increased FD rates. So for those who prefer FD investments, it is good news."
Says Renu Maheshwari, chief executive officer and principal advisor, Finzscholarz Wealth Manager, and a Sebi-registered investment advisor: "The senior citizen savings scheme has always given a percentage more than regular fixed income schemes. This is on expected lines. With the interest rates going up and some bank FDs fetching seven per cent, this should not be a surprise that the senior citizen scheme will give an annualized return of eight per cent."
"This scheme should not be compared with PPF or other post office schemes. PPF is meant to accumulate for retirement, and better alternatives are available. For example, EPF, NPS, and regular investment in the equity market can give better returns than PPF. A long-term investment also means that the volatilities of the market will be taken care of," she adds.
However, some experts feel that this move is a ploy by the government to attract a substantial vote bank for the next election. "Ideally, when the RBI announces the monetary policy, the changes in rates have to uniformly be applied across various loans and saving schemes so that there is no specific bias and discrepancy in how interest rates are structured. Boosting the preference of a certain demographic is understandable to a certain extent, but cross-subsidizing it further is not advisable from an overall monetary system perspective," says Chenthil Iyer, founder and chief strategist of Horus Financial Consultants.
"The current preference for senior citizens may have a political motivation too, as 2024 general elections are approaching and senior citizens are a powerful vote bank for the incumbent government. With time and the internet at their disposal, senior citizens have become the biggest consumers of social media narratives and propaganda. Making sure they earn more interest could certainly benefit politically," adds Iyer.
He further said that the senior citizens saving scheme getting the steepest hike whereas PPF remains the same is quite unnatural and unscientific. "Banks haven't been passing on the interest rate hikes on savings and deposits in the same way they have been increasing the loan rates. This discrepancy also should be dealt with urgently by the RBI," says Iyer.
Again, it would be wrong to highlight that only senior citizens have been favoured. Even young investors who are risk-averse will get the benefit of rate hikes in term deposits. Although rates for both Kisan Vikas Patra and National Savings Certificate have been raised by 20 basis points, it'll not make a major difference. The young population, willing to take investment risks with a time horizon of seven years or more, has alternatives to small savings schemes too. They may look to invest in equity products based on their investment objectives, risk profile, investment time horizon, and personal and macroeconomic scenarios.
Favourable Rates For Senior Citizens
Most banks and small savings schemes offer special interest rates for senior citizens. Typically these tend to be 20 to 50bsp over and above the usual rates. So, an FD that offers 7.5 per cent to the regular depositor would offer 7.75-eight per cent for the same deposit if the depositor were a senior citizen. There are also special schemes, such as the Senior Citizen Savings Scheme (SCSS), which are exclusively meant for people over the age of 60 years. According to experts, At eight per cent, the SCSS offers one of the best rates for long-term deposits for senior citizens currently, higher than most banks. However, this may change if bank FD rates go up in the coming months due to further upward revisions of the repo rate.
"If senior citizens can maintain their purchasing power, it may be considered a favourable investment choice for them. Where general inflation is around six-seven per cent and medical inflation is in double digits, it's challenging for senior citizens to bank only on fixed-income products because of taxation and inflation. While interest earned on SCSS is not tax-free, the investors get exemptions up to Rs 50,000 on interest earned in a financial year u/s 80TTB. Therefore, anything in the range of eight per cent is a good choice for them," says Sen.
While some experts feel the favourable rate should be around eight per cent, others think it should be 7.2 to 7.4 per cent. "My preferred rate for senior citizens in the current scenario would be around 7.2-7.4 per cent. Or a maximum of 7.5 per cent," adds Iyer.
According to Maheshwari, an eight per cent rate in the backdrop of an inflation rate of below six per cent gives an inflation-adjusted return of more than two per cent. "This is a very attractive deal, and senior citizens should use it. We always recommend senior citizens, retired clients, to make use of this scheme," adds Maheshwari.
