Considering Depositing Rs 2000 notes in Small Saving Schemes? Read This…

The government's proactive measure to require income proof for investments of Rs 10 lakh or above in Small Savings Schemes, following the withdrawal of the Rs 2000 denomination, aims to tackle money laundering and terrorist financing.

The government has implemented new requirements for individuals investing more than Rs 10 lakhs in Post-office Schemes, mandating the provision of proof demonstrating the source of funds. Additionally, stringent compliance rules for Know Your Customer (KYC), Anti Money Laundering (AML), and Combating the Financing of Terrorism (CFT) have been applied to all investments in Post-office Schemes to prevent potential misuse for terrorist financing or money laundering activities. Under revised norms, the Department of Posts has instructed Post-office officials to collect income proofs from specific categories of investors in Small Savings Schemes. This directive was communicated through a circular issued on May 25, 2023.

As you must be aware, The Reserve Bank of India (RBI) has recently announced its decision to withdraw the largest currency note, the Rs 2000 banknote, from circulation. While this note will still be considered legal tender, citizens are advised to either deposit or exchange these notes by September 30, 2023. Following the announcement, numerous individuals who possessed a substantial amount of Rs 2000 banknotes contemplated investing this sum in various investment options, including Small Saving Schemes. Nevertheless, the recent stipulation of providing the source of funds for investments equal to or exceeding Rs 10 lakhs in Small Saving Schemes signifies another step taken by the government to address the issues of money laundering and terrorist financing.

Small Savings Schemes are a collection of savings instruments overseen by the central government, aimed at promoting regular savings among all individuals, regardless of their age. These schemes offer attractive returns, typically higher than those of bank fixed deposits, while maintaining low levels of risk and volatility. Moreover, they come with a sovereign guarantee and offer tax advantages. Examples of Small Saving Schemes include Post Office Deposits, Sukanya Samriddhi Yojana, National Savings Certificate, Public Provident Fund Scheme, Senior Citizen Savings Scheme, and more.

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Department of Posts has implemented a three-tiered categorisation system for customers to enhance the KYC process. The categories are determined based on the maturity value of certificates and the balance in savings accounts. Here are the details for each category:

1. Low-risk Category: Customers with certificates or a balance up to Rs 50,000 are placed in the low-risk category. They are required to submit two passport-size photographs and self-attested copies of their Aadhaar and Permanent Account Number (PAN) as documentation.

2. Medium-risk Category: Customers with investments ranging from Rs 50,000 to Rs 10 lakh are classified as medium-risk. Similar to the low-risk category, they are required to provide the aforementioned documents. Additionally, they need to submit address proof, such as a driving license, passport, and utility bills.

3. High-risk Category: Customers with investments exceeding Rs 10 lakh fall under the high-risk category. Apart from the standard documentation, they must provide proof of the source of funds. This can include bank statements, income tax returns, succession certificates, sale deeds, or any other relevant documents that demonstrate their income or fund sources.

Some key points to know:

• The accounts associated with Politically Exposed Persons (PEPs) residing outside India will be classified as part of the High-Risk Category. PEPs are individuals who currently hold or have held significant public positions in foreign countries. This includes Heads of State/Governments, senior politicians, senior government officials, judicial or military officers, senior executives of state-owned corporations, and prominent officials within political parties.

• In the case of a minor investor, the KYC and income proof requirements of the guardian are applicable. The guardian is responsible for providing the required documentation for the KYC process on behalf of the minor investor.

• Customers categorised as low-risk, medium-risk, and high-risk are mandated to re-submit their KYC documents at intervals of seven, five, and two years, respectively. This requirement ensures that the provided information remains current and aligns with regulatory standards.

• Account holders who have not yet provided their Aadhaar information are required to do so before September 30, 2023. Additionally, if the account balance exceeds Rs 50,000, aggregate credits surpass Rs 1 lakh in a financial year, or transfers or withdrawals from the account go beyond Rs 10,000 in a month, PAN details must be provided within two months.

• If the necessary documentation is not submitted, the account will be rendered non-operational.

Submission of documents:

As per the circular, investors are required to submit documentation demonstrating the source of funds for their investments. Investors can provide the following documents as proof of the source of funds:

• Bank/Post Office Account statement reflecting the source of funds

• Any of the income tax returns filed during the past three financial years show a correlation between investment and gross income

• Sale deed, gift deed, will, letter of administration, or succession certificate

• Any other document that indicates the income or source of funds

Regardless of their risk categories, all investors need to provide the following documents to proceed with the investment:

• Photographs: 2 recent passport-size photographs. In joint accounts, photographs of all joint holders are required

• ID proof: Aadhaar and PAN

• Address proof: Aadhaar number or PAN, and if these documents do not indicate the present address, any other valid document such as a passport, driving license, Voter's ID Card, or utility bills (not older than two months)

Take note that all documents must be self-attested by the investor. In joint accounts, ID and address proof for all joint depositors must be provided. For basic savings accounts, it is mandatory to provide documentation proving that the depositor is a beneficiary of any government scheme.

When a depositor requests the maturity value to be credited to an existing savings account, it should only be allowed if the savings account has been opened with proper KYC documents based on the appropriate risk category determined by the account balance after the maturity value is credited. If a new savings account is opened for the credit of maturity value, KYC documents of the appropriate risk category must be obtained based on the maturity value being credited into the account, as mentioned in the circular.

Final words:

While Small Savings Schemes offer attractive returns, investors must carefully consider their liquidity needs and align their investment horizon with the duration of the chosen scheme. The government's decision to withdraw the Rs 2000 denomination note and introduce stricter KYC requirements for investments in Small Saving Schemes reflects their commitment to combat money laundering and terrorist financing. It is crucial for existing India Post depositors to adhere to the submission deadlines for Aadhaar and PAN details to avoid non-operational accounts. Regular re-KYC updates and the necessary investment documentation are essential to maintain compliance and transparency in the financial system.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.