Delaying the initiation of a retirement savings plan is a common blunder that many individuals make. Another fundamental error in financial planning is neglecting savings in favour of fulfilling immediate desires. As individuals work throughout their lives, they often aspire to retire and pursue their passions. Therefore, it becomes critical to arrange their finances in a way that allows them to have a comfortable and stress-free retirement. As investors near retirement, they often seek secure investment options that can provide a steady source of income and allow them to easily liquidate their funds in case of emergencies. Two popular options that often come up in discussions are bonds and senior citizen savings schemes. To compare the two investment options, let’s consider the investment goals of Mr. and Mrs. Sharma, a retired couple. They are seeking a reliable income source to finance their travel goals, earn higher returns, and have the ability to liquidate their funds easily in case of emergencies.
| Features | Bond | Senior Citizen Savings Scheme (SCSS) |
| Definition | A bond is a fixed-income security that represents a loan made by an investor to a borrower (typically corporate or government) for a defined period, with a fixed interest rate. | The SCSS is a savings scheme specifically designed for senior citizens (age 60 or above) in India, offering fixed and secure returns on their investment. |
| Issuer | Bonds are issued by corporations, governments, municipalities, and other entities to finance their operations or projects. | SCSS is issued by the Indian government. |
| Interest Rate | Bonds offer a fixed or variable interest rate, depending on the bond’s terms and conditions. | Senior citizen saving scheme interest rate is fixed and higher than the current savings account rate. As of March 2023, the SCSS interest rate is 8% per annum. |
| Maturity Period | Bonds have a specified maturity period, which can range from a few months to several years. | SCSS has a maturity period of five years, which can be extended for an additional three years. |
| Risk | Bonds carry a certain level of risk, depending on the issuer’s financial stability and creditworthiness. | SCSS is considered a low-risk investment option, as it is backed by the Indian government. |
| Taxation | The interest earned on bonds is taxable at the investor’s marginal tax rate. | The interest earned on SCSS is taxable, but investors can claim tax deductions under Section 80C of the Income Tax Act. |
| Liquidity | Bonds can be bought and sold on the secondary market, providing investors with some degree of liquidity. | SCSS is relatively illiquid, as it has a lock-in period of five years. However, premature withdrawal is allowed after the completion of one year, with a penalty. |
| Investment Limit | There is no upper limit on the amount that can be invested in bonds. | The 2023 union budget has announced an increase in the maximum investment limit for the SCSS from Rs. 15 lakhs to Rs. 30 lakhs per individual. |
| Eligibility | No age limit. Anyone above 18 can purchase. | 1. Anyone above 60 years of age. 2. A person has taken VRS after 55 years of age. 3. Retired military personnel aged between 50 and 60 years. |
From the table above, it was clear that both options had their advantages and disadvantages. Bonds offered a higher potential for returns, but also carried a higher level of risk. On the other hand, senior citizen savings schemes offered a fixed interest rate with lower risk but had lower liquidity and a longer investment horizon. After careful consideration, the Sharmas decided to invest in bonds rather than a senior citizen savings scheme. Here are some reasons why:
Bonds have the potential to offer higher returns compared to senior citizen savings schemes. This is because the interest rate on bonds varies. If the market is performing well, the returns on bonds could be significantly higher than the fixed interest rate offered by senior citizen savings schemes.
Investing in bonds allows for diversification of the investment portfolio. Bonds come in different types and from different issuers, which means that investors can spread their investments across different bonds to minimize their risk exposure. On the other hand, senior citizen savings schemes are offered by the government and have a fixed interest rate, which means that investors cannot diversify their investment.
Bonds are more liquid compared to senior citizen savings schemes. This means that investors can sell their bonds easily in the secondary market if they need cash. Senior citizen savings schemes, on the other hand, have a lock-in period and cannot be easily liquidated.
Investing in bonds can offer tax benefits to investors. For example, certain bonds are exempt from taxes, while others offer tax deductions on the interest earned. Senior citizen savings schemes also offer tax benefits. The interest gained from SCSS deposits up to Rs. 50,000 is exempt from tax and only becomes taxable if the accumulated interest in all SCSS accounts goes beyond Rs. 50,000. Submitting form 15G/15H and maintaining an accrued interest below the specified limit of Rs. 50,000 will prevent a TDS deduction. But generally, the tax benefits on bonds are usually more significant.
In conclusion, investing in bonds is a better option compared to senior citizen savings schemes for Sharmas since it matches their investment requirements. While senior citizen savings schemes offer a fixed interest rate with low risk, bonds offer higher returns, diversification, liquidity, and tax benefits. Hence, investors should invest according to their risk appetite and investment goals.
A: SCSS can be opened at designated bank branches or post offices, while bonds can be purchased through brokers or online trading platforms like IndiaBonds.
A: It is possible to close or withdraw funds from an SCSS account before maturity, but a penalty will be deducted from the account balance. The amount of the penalty will vary between 1-1.5%, depending on how long the account has been open. However, this option is only available one year after the account was first opened.
A: Yes, SCSS accounts can be transferred from one bank or post office to another, subject to certain conditions and procedures.
A: The following individuals are not eligible to invest in the Senior Citizen Savings Scheme:
Non-resident Indians (NRIs)
Hindu Undivided Families (HUFs)
Citizens under the age of 60
A: The choice between bonds and SCSS depends on your investment goals, risk tolerance, and financial situation. However, if you are looking for relatively higher returns and liquidity bonds can be a good option.
Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.
