Senior Citizen Savings Scheme: IBA Asks Banks Not to Levy Penalty on Premature Withdrawal in Case of Death

 Giving a big relief to nominees of a depositor of Senior Citizen Savings Scheme (SCSS), the Indian Banks’ Association has asked its member banks not to levy any penalty on withdrawal from the scheme by a nominee or legal heir after the death of the account holder.

 

In a circular, IBA, says, it has come across complaint(s) that some banks, while processing settlements or premature payments of accounts to the legal heirs or nominees of the deceased depositor under the SCSS, are treating it as premature withdrawal and levying penal interest

"...we request all member banks to be guided by the SCSS rules to avoid any complaints. Further, we suggest the member banks to devise a mechanism for capturing the closure or premature reason in their core banking system or solution (CBS) for seamless processing of such applications received from the customers," the association of banks and other entities in the banking sector in India, says.

 

As per the amendment made on 28 July 2010 in Rule 8, sub-rule (3) of SCSS rules, "In case of death of a depositor before maturity, the account shall be closed and the deposit refunded on an application in Form ‘F’ along with interest as applicable to the scheme till the date on which the depositor expired, to the nominee or legal heirs in case the nominee has also expired or nomination as provided in rule 6 was not made, as the case may be. For the period between the day following the date of death of the depositor and the date on which refund is made, simple interest shall be paid at the rate applicable from time to time to savings accounts as provided in Rule 6 of the Post Office Savings Accounts Rules, 1981.”

 

In addition, IBA says, Rule 8 sub-rule (5) clearly states: "No deduction, as specified under rule 9, shall be made in case of premature closure of an account at any time due to death of a depositor."

 

However, many banks continue to treat withdrawals from SCSS account following death of the depositor as premature closure and deduct 1% to 1.5% from the deposit as penalty as defined under Rule 9 of the SCSS rules. As per the rule, the depositor may be permitted to withdraw the deposit and close the account at any time after the expiry of one year from the date of opening of the account with some conditions. 

 

As per the conditions, if the SCSS account is closed between one and two years from the date of its opening, banks can deduct 1.5% from the deposit and refund the balance. If the account is closed after two years, then banks can deduct 1% from the deposit.  

 

As the name suggests, SCSS is a popular investment option among those who are 60 years and above. However, many depositors complain that they do not receive the rate of interest as stipulated under the scheme. 

 

According to one senior citizen, software of some banks pays interest at the prevailing rate when renewal request is submitted. "Actually, it should be the rate on the date when SCSS becomes due," he says.

 

Further, he feels, the banking software installed at many banks perhaps does not have customer number or customer identification (CID) concept for SCSS. "So, whenever an additional deposit is made, we are required to give all the documents including photos."

 

SCSS, which offers guaranteed quarterly interest pay-out, was introduced in the year 2004 with the objective of providing senior citizens with a steady and secure source of income for their post-retirement.

 

This account can be opened in any bank or post-office and has a maturity period of five years and can be extended for a further period of three years (request must be submitted by filling in form B within one year of maturity). Thus, effectively, this scheme is limited to five years. Only a one-time extension up to three years is possible; hence, one cannot invest in this scheme beyond eight years.

 

A maximum of Rs15 lakh can be invested (individually or jointly in the scheme). One can open a joint account only with his or her spouse. 

 

The rate of interest offered under the SCSS is revised every quarter by the ministry of finance and its derivation depends on several factors such as the prevalent rates in the market, and inflation level.

 

Currently, the interest rate on SCSS is 7.4% per annum, payable quarterly. For this scheme, tax benefits are available under section 80C of the Income Tax Act. However, interest earned under SCSS is fully taxable and needs to be added as ‘income from other sources’.