Considering Prematurely Closing Your SCSS Account? Watch Out the Penalty

Currently, among all the small saving schemes, SCSS offers the highest interest rate 8.20% per annum.

This interest is paid quarterly on the first working day of April, July, October, and January, directly into the savings account, enabling senior citizens to plan their cash flow needs.

If the amount of interest earned on SCSS deposits is above Rs 50,000 in a financial year (for senior citizens), Tax Deduction at Source (TDS) takes place (as per Section 194A of the Income Tax Act, 1961).

Those depositors/accountholders (senior citizens) earning interest less than Rs 50,000 in a financial year can furnish Form 15G or 15H (as the case may be) to the bank/post office to avoid TDS if the accrued interest earned is less than the aforesaid prescribed limit.

Other than the attractive rate of interest and tax benefit, SCSS provides the account holder/s the option to prematurely close and withdraw any time before the maturity period of 5 years, recognising that money may be needed to meet an emergency or any other purpose for that matter. Note that multiple withdrawals from the SCSS account are not permitted.

To prematurely close and withdraw, all you need to do is submit an application for premature closure of the SCSS account in Form 2 along with necessary documents (viz. Aadhaar, PAN, SCSS passbook, etc.) to the bank or post office with whom you hold the account.

However, Watch Out for the Penalty

When prematurely closing and withdrawing from the SCSS account, you need to be mindful of the conditions as regards the penalty. It is important to note the following:

• If the SCSS account is closed before 1 year, no interest will be payable. And if any interest is paid against the deposit, it shall be recovered from the principal amount.

• If the SCSS account is closed after 1 year but before 2 years from the date of opening, an amount equal to 1.5% will be deducted from the principal amount.

• If the SCSS account is closed after 2 years but before 5 years from the date of opening, an amount equal to 1% will be deducted from the principal amount.

• In case you have completed the 5-year maturity period in SCSS and then extended the account for a block of 3 years, then the extended SCSS account can be closed after the expiry of one year from the date of extension of the account without any deduction.

The exception to these penalty conditions is that if the SCSS accountholder passes away, the SCSS deposit can be withdrawn prematurely without any penalty. In such a case the nominee or legal heir would receive the principal amount and interest earned on the deceased's SCSS account.

The Tax Implications on Withdrawal from SCSS

With effect from August 29, 2024, withdrawals from the SCSS account are exempt from tax. Given the unpredictable nature of life, this amendment by the government is largely in the interest of depositors/accountholders.

To Sum Up...

While SCSS provides you with the flexibility to prematurely close and withdraw, it must be used judiciously in the interests of your financial well-being, so that you have a decent corpus and liquidity to live the sunset years of life comfortably.

To know how much corpus you need for a comfortable retirement, use PersonalFN's retirement calculator.

"As in all successful ventures, the foundation of a good retirement is planning." - Earl Nightingale.

Be thoughtful in your approach.

Happy Planning and Investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.