BOMBAY, 23 August 2004 — Fitting the requirements of safety, good interest rates and protection of the capital, a new savings scheme was unveiled by Finance Minister P. Chidambaram in the national budget declared last month.

Known as the Senior Citizens Savings Scheme it replaces the Varishtha Bima Pension Yojana launched for senior citizens last year. The scheme provides a return of 9 percent to those above the age of 60 years and for those who are above 55 years and have obtained early retirement under any voluntary retirement scheme (VRS). The scheme is available only through post offices.

The difference between the Varishtha Bima Yojana and this one is that the previous one had a Rs.2.67 lakh limit for investment whereas in the senior citizens scheme, the limit if Rs.15 lakh. However, Varishtha Bima which was valid for 15 years and provided for monthly payment the new scheme allows for only quarterly payouts for a maximum of eight years.

To obtain a 9 percent return senior citizens will need to open an account by providing proof of age and their Permanent Account Number issued by the Income Tax department where applicable. Those below 60 years and above 55 years will have to provide proof of having availed of a VRS.

The scheme is valid for five years and can be extended for a further three years for which period the 8 percent return will be guaranteed. An individual can invest up to Rs.15 lakh and receive interest quarterly. A Rs.15-lakh investment will fetch a quarterly return of Rs. 33,175.

The scheme will also be a bonanza for small savings agents since they will be entitled to a commission of 0.5 percent as against the 0.1 percent commission that the Life Insurance Corporation (LIC) was paying out under the Varishtha Bima scheme.

Senior citizens who are 60 years or above can invest under the scheme. According to the rules, a person has to be 60 on the day an account is opened under the scheme. And for those who have taken the VRS, the account can be opened if one has crossed 55 years of age only when such an account is opened within three months of the date of retirement and a certificate is obtained from the employer.

In case the deposit is less than Rs.1 lakh then it can be made in cash. For higher amounts, a check or demand draft (DD) is required.

The depositor can withdraw and close the account after one year of the account opening though there will be a penalty for early withdrawal. If the account is closed after one year but before two years, then 1.5 percent of the deposit shall be deducted and the balance paid to the depositor. A withdrawal after two years will involve a penalty of 1 percent. For those who may need the funds before three years can consider this savings scheme over Post Office Monthly Income Scheme (POMIS) as the returns are better for the new scheme.

An interest of 9 percent is payable at the end of each quarter. The interest can be credited to the depositors’ savings account with the post office. But no additional interest will be given on the unclaimed interest, so there is really no benefit of compounding. At the maximum limit of Rs.15 lakh, the annual assured cash flow amounts to Rs.1.35 lakh. The Varishtha scheme offered a maximum pension of Rs.24,000 per annum.

Income from the Senior Citizen’s Savings Scheme is fully taxable. But this should not pose problems as income up to Rs.1.5 lakh is already exempt from tax for senior citizens. In fact a smart analyst has said that if a person invests Rs.15 lakh in savings scheme and further Rs.3 lakh in POMIS, he still will not attract any tax liability, as POMIS is eligible for deduction under section 80 L up to Rs.12,000.

The Department of Posts is taking measures to make it easier for savers to receive interest payments. The department has decided to issue post-dated checks and eventually move toward electronic clearing system (ECS) so that interest payments can be credited directly to the saver’s account.

The Post Office is today the largest bank in the country with deposits of above Rs.3,000 billion. Maharashtra alone accounts for Rs.160 billion of deposits and 1.63 billion accounts.