When your options for bank deposits are flexible, you need not invest all your funds in FDs, but can spread them out across different instruments. This helps you to diversify your investments and expands the reach of your hand.
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Moreover, even when you decide to invest in FDs, won’t it help if you reinvest periodically? Invest first in short-term FDs and then as it matures, invest again for longer stretches of time. Keep the process alive even as different FDs mature. This could be an important lever that will enable you to meet your monthly income needs.
It is not necessary to lock all your funds only for the short term. Depending on the kitty, you may spread some of it out across longer maturities to help you get the liquidity that can measure up to what you want and when you want it.
For example, look at the five-year tax-saving bank FD and don’t forget to grab the Section 80C tax benefit. However, remember that you won’t be withdrawing the amount for five years, hence also remember to factor a taxable interest income in it.
While the amount of tax is saved in the same year that you invest, many banks actually offer it at a rate less than that on conventional deposits (non-tax saving options.) Hence, remember, finally, that you need to choose carefully after considering the real comparative returns.
Other savings schemes
A number of alternative savings schemes for the elderly have been suggested. They include:
Pradhan Mantri Vaya Vandana Yojana (VPBY)
How it helps: The policy is open for 10 years and fetches an interest rate of 8% per annum. If you invest a one-time premium payment of around Rs 1,44,578 you can get a monthly pension of Rs 1,000 for 10 years. Alternatively, a one-time premium payment of Rs 7,22,892 can fetch you a monthly pension of Rs 5000. Hence, the monthly interest rate works out to 8.30% for monthly pension.
A ceiling of maximum pension is fixed for an entire family, i.e., the total amount of pension should not exceed the maximum pension limit. The pensioner, his/her spouse and dependents are eligible to get the returns.
How it does not: This scheme was launched this year for senior citizens above 60. It is open for subscription from May 4, 2017 to May 3, 2018 only. The pension income is taxable, depending on the income slab of the pensioner. Your one-time payment gets locked up and cannot be withdrawn to meet unexpected problems, unless under exceptional circumstances.
Senior Citizens’ Saving Scheme (SCSS)
How it helps: At an interest rate of 8.4%, this scheme can be tried out at a post office or a bank. If you are 60 years or above, you can invest within a month of getting your retirement funds.
Otherwise, if you are between 55 and 60 years, you can invest in this, provided you have opted for voluntary retirement or superannuation and you invest in a month after you receive your retirement benefits. Even though it is for a term of five years, you can extend it for three more years after maturity. Through these investments, you can save tax according to the rules of Section 80C of the Income Tax Act, 1961.
How it does not: The SCSS is not valid forever, but can be banked upon only for a while, based on the market rate. Moreover, you cannot withdraw in the first year. If your investment can get you an interest that is more than Rs.10,000 per year, then Tax Deducted at Source (TDS) is applicable.
Post Office Monthly Income Scheme (POMIS) Account
How it helps: This is an interesting investment option in which you can put in a maximum of Rs 9 lakh if you take up joint ownership with someone else. Otherwise, you can go in for the 4.5 lakh option on single ownership.
The interest rate happens to get set every quarter. At present, it is 7.8% per annum. It can be paid every month. You need not even visit the post office each month, but can directly have it credited to the post office savings account.
Alternatively, the interest can be directly transferred from the savings account into the recurring deposit when you visit the post office.
How it does not: Investing in this scheme does not bring any tax benefits. The interest is totally taxable.
Mutual funds (MFs)
How it helps: Investing some of your funds post retirement into equity-backed products can be helpful. After you retire, whatever you arrange to get back or earn regularly would still be subject to inflation. Research shows that investing in equities can get you higher inflation-adjusted returns as compared to other assets.
Even for your monthly income plans (MIPs), you could allocate some of the percentage into equity mutual funds (MFs).
One advantage of debt funds is easy liquidity. That is why it would be advisable for retirees to go for it. Even if debt funds are taxed, they would be a better choice than to go for bank deposits, especially for people who are categorised in the highest tax bracket.
Interest on bank deposits can be taxed according to the tax bracket of 30.9% for the higher slabs, while the income that is earned from these debt funds attract tax of 20% after indexation, especially if they are held for more than three years, regardless of the tax bracket.
How it does not: Retirees need to be cautious about thematic and sectoral funds, including those that are mid-and small-cap funds (depending on the size of the companies in which the investments are made.) It would of course be wiser to go for stable returns, instead of high risk-high return ones.
Tax Free Bonds
How it helps: A number of tax-free bonds are currently not in the primary market, yet some of them can be part of a retired person’s portfolio. Government-backed institutions including Indian Railway Finance Corporation Ltd (IRFC), Power Finance Corporation Ltd (PFC), National Highways Authority of India (NHAI), Housing and Urban Development Corporation Ltd (HUDCO), Rural Electrification Corporation Ltd (REC), NTPC Ltd and Indian Renewable Energy Development have gone in for offers of tax free bonds.
Before you go for these, just remember a few things. Firstly, as they are long-term investments, they become mature only after a gap of 10, 15 and 20 years. If you feel that you can afford to park the funds for so long, you could invest in them.
If you find that the interest is tax-free, you might like to settle for them, as there would be no Tax Deducted at Source (TDS).
Examining the last two tax-free bond issues showed that the returns – even for higher tax-bracket investors – seemed to be quite beneficial, as compared to other available taxable investment alternatives.
How it does not: Liquidity is not high if you invest in tax-free bonds. While they might be part of stock exchange lists that help to give an exit route to investors, the price and volumes that are mentioned might not be favourable. Moreover, they give options for annual but not monthly interest payouts. Hence, they might not help to boost your monthly cash needs.
How it helps: These schemes are floated by life insurance companies. The pension or annuity is taxable and works out to be about 5-6% per annum. About seven to ten different pension options exist, including lifetime, spouse pension (post death) and after that, the return of the corpus to the heirs.
How it does not: The investor might not get a return of capital. Hence, the amount that is used to purchase the annuity is never returned. The corpus is not returned to the investor in his lifetime under any pension option. Any investor who can opt for and build up his portfolio may not find it too beneficial. Hence, it would be beneficial to go for diverse investments instead of this one alone. The returns offered on these immediate annuities are not too high now anyway.