9% FD vs 8.2% SCSS: The Hidden Tax Trap Few Seniors See

Among senior citizens, there is a key question in personal finance that is dominating conversations among retirees: Should seniors chase the 9% returns offered by some fixed deposits by small finance banks, or stick to the safer 8.2% from the government-backed Senior Citizen Savings Scheme (SCSS)?

On the surface, FDs look more attractive, but there's a catch: FDs are insured only up to Rs 5 lakh by DICGC. Anything above that carries credit risk. SCSS, though capped at Rs 30 lakh, is fully backed by the Government of India.

Many seniors are splitting their savings SCSS for safety + FDs for yield, but very few understand the tax and liquidity trade-offs. In connection, here's how retirees can protect themselves from risky "too good to be true" schemes.

SCSS or High-Yield FDs? The Tax Twist That Changes Returns for Retirees

From the above example, a net interest of Rs 2,43,000 would be paid to the senior citizen on the FD. According to their income tax bracket, they must still pay tax on the entire Rs 2,70,000. The TDS deduction of Rs 27,000 is only an advance tax payment. They must take this into consideration when submitting their Income Tax Return (ITR), and if their slab rate exceeds 10%, they could have to pay more tax.

The underlying catch is that many elderly persons, who may be in the zero tax band or a low tax bracket, believe that the TDS deducted is the only tax they would pay, even if their net income from SCSS is lower. They frequently fail to take into consideration that TDS is just a deduction at source and that the entire interest income is taxable.

Senior citizens must submit Form 15H to their bank or post office at the start of each fiscal year, stating that their total income is below the taxable limit, in order to prevent TDS from being deducted.

For many retirees, the 9% returns advertised by some fixed deposits (FDs) look attractive compared to the 8.2% offered by the Senior Citizens' Savings Scheme (SCSS). But the real decision goes beyond the headline rates.

Rohit R Chauhan Founder Ingood said, "Take a senior in the 30% tax bracket investing Rs 10 lakh. In a 9% FD, the annual interest is Rs 90,000, but after tax, only about Rs 63,000 remains with an effective return of 6.3%. By contrast, SCSS at 8.2% yields Rs 82,000 annually. Even after tax, the post-tax return often works out better because of quarterly payouts and Section 80C benefits at the time of investment. SCSS also provides government backing, making it virtually risk-free. The drawback is liquidity: funds are locked for 5 years, with penalties for premature withdrawal."

FDs offer flexibility in tenure of 1-5 years and higher nominal returns, but penalties for breaking and full taxation reduce the advantage.

"For those in lower tax brackets, eg, 10%, a portion in high-yield FDs may still make sense. That's why many seniors split allocations, for example, Rs 6-7 lakh in SCSS for safety and Rs 3-4 lakh in FDs for extra yield. The right balance depends on personal tax status and cash flow needs, not just the headline rate," Rohit R Chauhan added.

Beyond Returns: Why Liquidity & Tax Rules Matter More for Senior Citizens?

It is very important for Senior Citizens to strike the right balance between returns, safety and liquidity. Senior Citizen Savings Scheme (SCSS) offers a fixed 8.2% p.a. rate of interest (as of Q2 FY25). This is a government-backed scheme and is extremely safe with practically zero default risk. Senior citizens can invest upto Rs. 30 Lakhs in SCSS. Interest payout is on a quarterly basis, thus helping them get a regular income and manage expenses.

"As the fixed tenure for SCSS is 5 years, they should plan to invest an amount under / upto the maximum limit, which may not be required for the next 5 years, as premature withdrawals are allowed only with penalties. Interest is also taxable, as it is included as part of your income for that particular FY in which you receive the interest amount. In case a person is already in a particular tax bracket, the net returns may reduce to the extent of tax payable," said Sameer Mathur MD and Founder of Roinet Solution.

"If the amount to keep in fixed income assets is probably the only amount to meet expenses, then chasing higher returns is not advisable. Higher interest means higher risk. And not all banks / NBFCs offering higher interest rates are safe. As there is an insurance protection limit is only Rs. 5 Lakh per depositor per bank (DICGC), an amount exceeding Rs. 30 lakhs can be split as Rs. 5 Lakh each in well-rated and reputed banks, which can help with liquidity also, as they may offer flexibility of tenures on your investments," Sameer Mathur further added.

From April 2025, senior citizens can claim TDS exemption upto Rs. 1 lakh/- in a financial year on the FD interest income. For those 60 years of age or older, TDS (Tax Deducted at Source) on the Senior Citizen Savings Scheme (SCSS) is applicable if interest received in a fiscal year surpasses Rs 50,000 at a rate of 10%. To avoid TDS deduction, you can submit Form 15H if your total income is less than the basic exemption threshold. The limit is Rs 10,000 for individuals between the ages of 55 and 60.

Longevity, Inflation & Peer Pressure: The Hidden Triggers Behind Seniors' Investment Choices

The first and foremost thing over here is to understand there is no one size that fit all, and the decision to stay in safer SCSS or FD can be discussed and deliberated in in silos, rather it has to be analysed and discussed based on individual parameters such as life aspirations, goals, cash flow needs, tax bracket, and risk appetite among others.

Before we delve into more details, it is also imperative to understand 'Why Seniors are splitting their savings between SCSS and FD. To understand the why of the same, we need to dive into both economic as well as psychological factors which are pushing for this!
As per Sidhharrth S Kumaar, Astrologer, Numerologist, Life & Relationship Coach, & Founder, NumroVani, at the moment, seniors are actually experiencing a double-fold psychological challenge.

a) Anxiety around increasing longevity

A careful consideration is evolving around whether their money would be able to suffice with an increased life span and an exponential rise in inflation all across. There is a perceived fear around this. As per 'How India Thinks 2024' study of NumroVani with 5,000 Seniors all across India, 75% of them are actually worried and reevaluating ways to maximise their gain.

b) Perceived pressure of diversification

Seniors are also experiencing indirect mental pressure from seeing Gen Z and late millennials, and are trying to diversify their options. A perceived fear of being left behind in the race is crippling them from exploring more options.

There are other reasons as well, such as misspelling by the bank, social media pressure, among others.

What Should They Do?

The ideal path for seniors is not an "either-or" between SCSS and FDs, but a layered approach that balances safety, income, and flexibility while acknowledging psychological comfort.

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