Falling interest rates on bank savings/ fixed deposits have affected everyone, but senior citizen have been hit the most, as many elderly investors park their savings in the bank savings account/ fixed deposits (FDs) where, they earn interest periodically that helps meet their day-to-day expenses. As interest rates — both on savings accounts and FDs — have been coming down for some time consistently, they have been receiving lower in-hand money over the years with having to meet the increased costs of day today needs.
As ability to take risk comes down substantially for them post retirement and with a shorter time horizon to invest, they cannot risk the money by investing in equity as an asset class, which helps you guards you against inflation and earn better returns. In this article, I will discuss some of the products/investment avenues, which can help shield you against lower deposit rates.
Pradhan Mantri Vaya Vandana Yojana
One can invest in this scheme until May 3, 2018. Under this scheme, which is managed by the Life Insurance Corporation of India (LIC), you get a guaranteed annuity in the form of periodical payments @ 8% (pension) for 10 years. The scheme can be purchased online as well as offline by any individual above 60 years but not a Hindu Undivided Family (HUF). The ceiling for the maximum pension, which a family can earn, is capped at Rs 5,000 per month and accordingly the money one can invest is also calculated.
The family for this purpose will comprise of the pensioner, his/her spouse and dependants. This is basically a pension plan with return of capital sum. Under this scheme you can opt to receive the annuity at monthly, quarterly, half yearly or yearly interval. Depending on payment frequency chosen by you, you need to deposit the money with LIC. Under this scheme, you are normally not allowed to withdraw the purchase price before completion of 10 years but in case of terminal/critical illness of the spouse or self, you are allowed to withdraw money with deduction of 2% of the capital sum.
However, on completion of 10 years, you will get back the full capital, which is not taxable in your hand at the time of the receipt. Please note that unlike the Senior Citizen Savings Scheme, you do not get any tax benefit for deposits made in the account. The periodical annuity received is taxable in your hand at the slab rate applicable to you.
In my opinion this is an excellent scheme as it offers guaranteed payment @ 8% for the next 10 years especially at a time when interest rates are on falling and may further come down.
Senior Citizen Savings Scheme (SCSS)
If you have completed 60 years of age, you can open this account with post office or designated banks either in your name or jointly with your spouse (In case the spouse is a joint holder, he/she need not have completed 60 years). Only a spouse can become a joint-holder under this scheme. Your spouse can also individually open an account under this scheme provided he/she has also completed 60 years of age. As in case of the Varisht Vaya Vandana Yojana, an SCSS account cannot be opened by an HUF. Likewise, non resident Indians (NRIs) or persons of Indian origin (PIOs) are also not eligible to invest under this scheme.
In case you have retired on superannuating or taken voluntary retirement then you can invest in the scheme provided you have completed 55 years of age at the time of your retirement. If you are retired from the defence services, the restriction on age for opening an SCSS account does not apply.
In such cases you need to open this account within a period of one month from the date of receipt of your retirement money, with proof of disbursal. In these cases the money to be invested under this scheme should be the money received as retirement benefits under the terms of such retirement. No such restriction applies for people who have completed 60 years of age. They can deposit any money under this scheme.
One can invest up to Rs 15 lakh in one name either at one go or in a piecemeal manner. . An SCSS account opened initially has a tenure of 5 years and can be extended for another period of three years. If you want to withdraw the money before completion of five years, you can do so only after the completion of one year, but with a penalty.
It is pertinent to note that as per the scheme, no part of deposit can be withdrawn during the first year. Therefore, it is advisable that you assess your financial requirement including for contingencies during the first year and keep aside the same. Interest under this scheme is decided every quarter by the government in advance.
Presently, the rate of interest for this scheme is 8.3%, which is paid quarterly. The interest earned on this scheme is fully taxable in your hand and 10% tax deduction at source (TDS) will be applicable at the time of payment of interest if the interest amount for the whole year exceeds Rs 10,000in a year.
However, you can submit form no 15H in case you have completed 60 years of age or 15 G if you have not completed 60 years of your age, to get interest without TDS. This is a good scheme as even though the rates are coming down, they are still far higher than the one offered on your fixed deposits, i.e. 6-7%. The money invested during the year under this scheme qualifies for deduction upto Rs 1.50 lakh every year under Section 80 C of the Income Tax Act as for senior citizens which is very good considering the fact that a very few avenues are available for claiming deduction under Section 80C.
National Savings Certificates (NSCs)
The third product in the category is NSCs, which have a tenure of five years. Moreover, the interest which you will earn on this investment is not subject to any change in future and is fixed at the time you buy the certificates. For an NSC issued, till September 30, 2017, the rate of interest is 7.80% and is fixed for the entire tenure of five years of the certificates. This guards you against the future changes in the interest rates which apply on other investments like Senior Citizen Saving scheme, Public Provident Fund etc. No tax is also deducted at source on interest accruing on NSCs.
So in the present interest rate cycle where the rates are expected to come down further, it makes sense for you to lock your interest rate for the next five years. There is no limit on the amount which you can invest in NSC. Moreover, you can avail of a credit facility against the security of the NSC in case you need money either by way of loan or as an overdraft facility. Like SCSS, investments made during the year in NSC qualify for deduction under Section 80C.
Monthly Income Plans of Mutual Funds
In addition to traditional investment avenues discussed above, senior citizens can also invest in monthly income plans (MIP) offered by mutual funds houses where a very small part of the money(15-25%) is invested in equity and the balance is invested in debt products.
Due to investments in equity, the schemes are able to better their overall returns as compared to pure debt products, while safety of the capital is ensured at the same time. Though the nomenclature of these schemes are generally monthly income plans, fund houses do not necessarily distribute or pay the unit holders on monthly basis.
If you want monthly funds, you can opt for systematic withdrawal plans (SWP). The returns generated by the MIPs are not fixed in advance like other products discussed above. The returns generated would depend largely on the prevailing interest rate and changes thereof. Average returns generated by these schemes are 8.95% 10.15% and 10.35% returns for last one, three and five year periods, respectively, as a category.
The money which is lying in your saving bank account and earns an average 4% (3.5% in some cases now) interest can be shifted to liquid fund which can be withdrawn and gets credited in 24 hours. The money can be withdrawn either fully or in part while earning returns even better than your fixed deposits. So any surplus money in your saving bank account can be shifted to liquid funds, thus improving your overall returns. If you are technology savvy and can manage online investing, investing and redeeming money in liquid funds is hassle-free.
I am sure that combinations of the above-mentioned products will help shield not only senior citizens but also all investors to shield themselves against falling bank deposit rates.
The author is a CA, CS and CFPCM and is presently the Company Secretary of Bombay Oxygen Corporation Limited. Views are personal.