Bonds vs. Senior Citizen Savings Scheme: Which One Is Better for You?

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.

Following are the results of the comparison of Bonds vs. Senior Citizen Savings Scheme:

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:

Higher Returns:

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.

Diversification:

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.

Liquidity:

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.

Tax Benefits:

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.

FAQs

Q: How can I invest in SCSS or Bonds?

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.

Q: Is there any penalty for premature withdrawal of SCSS?

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.

Q: Can SCSS accounts be transferred from one bank or post office to another?

A: Yes, SCSS accounts can be transferred from one bank or post office to another, subject to certain conditions and procedures.

Q: Who are not eligible to invest in SCSS?

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

Q: Bonds vs. SCSS, which one is better?

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.