Should I open a new SCSS account to secure a higher interest rate?

I opened a Senior Citizen Savings Scheme (SCSS) account two years ago at an interest rate of 7.4 per cent. Considering the current higher interest rate of 8.2 per cent, would you recommend closing and reopening the account to benefit from this rate? What penalties would apply? - Anonymous

If you close your Senior Citizen Savings Scheme (SCSS) account two years after opening it but before it matures at the end of five years, a penalty of 1 per cent of the deposited amount is charged.

For instance, if you've deposited Rs 15 lakh in SCSS, a penalty of Rs 15,000 will be applicable when the principal amount is refunded to you.

To secure the current higher interest rate of 8.2 per cent, you will need to open a new SCSS account with a fresh five-year tenure, which will be locked-in till maturity.

Implications of opening a new SCSS account

• Opening a new account at the higher interest rate means an increase of 0.8 per cent in earnings. Considering Rs 15 lakh is invested, this would translate into an additional interest income of Rs 21,000 during the first three years of the new SCSS account opening (after deducting the penalty of premature closing of the first SCSS account).
  
• Further, by opening a new SCSS account, you essentially extend your investment period. This extension is beneficial if you do not need the funds immediately after the original five-year term. However, if you require the funds, this might not be worthwhile as you'd have to pay the penalty again for prematurely closing the new SCSS account.

Our take

Before you close your current SCSS account and open a new one, consider the implications.

Opening a new SCSS account could be beneficial, provided you are prepared to go through the hassle of closing and opening an SCSS account for a meagre 0.8 per cent increase (Rs 21,000) in the interest rate.

Stick with your initial SCSS account if you need the funds immediately three years from now, i.e., when the five-year term concludes.

Also read: Does SCSS allow premature withdrawals?