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Insurance, FDs and other alternative investment instruments for the retired

Author: Col. Sanjeev Govila(Retd)/Tuesday, June 12, 2018/Categories: Ask the Finapolis

Insurance, FDs and other alternative investment instruments for the retired

I started a Public Provident Fund (PPF) at the age of 30. After 15 years, it is now due for maturity. I have around Rs 12 lakh lying in the PPF as of now. Kindly guide me whether I should redeem the money in my PPF account or should I extend it by another 5 years. Also, if I redeem then where should I invest the money to get maximum return on my investment.

Rohit Kadam, Mumbai.

Rohit, PPF is a very good, safe, Govt backed investing avenue where its returns from the current interest rate of 7.6% per annum are tax-free while still giving you tax benefits under Income Tax Section 80C each year. Prior to taxation, assuming a tax bracket of 30%, and with the aim of enabling you to compare apples with apples, PPF returns are equal to that of a bank FD giving you an interest of 10.85% per annum today. My suggestion for you is not only to extend it now, but also use the indefinite extension facility in it as long as you can.

When you extend it, you have two options – extend without any further contribution to it or extending with contribution. An extension without any further contribution means you continue to earn interest on your accumulated money and the account stays active without you having to make any the yearly investments. You can willingly opt for this option. Once the account has been classified as ‘extended without any further contribution’, you cannot make any fresh contribution for next five years. However, there is no limit to how much you can withdraw but only one withdrawal per financial year is allowed. The other option is where you choose to keep contributing to the account on a regular basis during the extension period. However, if you opt for this, you are allowed a withdrawal of a maximum up to 60% of the total during the 5-year extension. For example, if you have accumulated Rs 30 lakhs at the end of 15 years and opt for an ‘extension with contribution option’, you can withdraw up to Rs 18 lakhs during the extension period. The amount can be withdrawn as a chunk or in a staggered manner but the one withdrawal per year rule will still apply. 

I am retired government employee with a retirement corpus of Rs 30 lakh. I have insurance schemes with an annual premium outgo of Rs 2 lakh and bank fixed deposits for which I get 6.5% interest. Please advise me about other alternative investment instruments based on my age and risk profile.

Diwakar Reddy, Hyderabad

I would firstly question the logic of taking an insurance scheme with a premium outgo of Rs 2 lakh per year. Do you require the insurance because you wish to give protection to your family or you have planned it as an investment? From the premium amount I can make out that it is likely to be the latter, which is not the best of investments. Always buy insurance only for the purpose it is meant for – financial security for your family to cater for an eventuality of you not being there. Also question yourself whether your family is financially dependent on you now? You require insurance cover only if they still are. The amount of cover will be decided by the real need of financial protection you wish to provide them. Please remember that insurance is not for the purpose of leaving a large inheritance to your family if you pass away.

Bank FDs are secure but low interest financial instruments. If you are assessed to tax, the returns come out to be even lower since FDs are fully taxable. However, in the Budget 2018, Rs 50,000 of interest from bank and post office FDs is exempt from tax for senior citizens, implying that interest on Rs 7.5-8 lakh of bank FDs, depending on the interest rate you get, is exempt for you from this financial year onwards. But as you are concerned about the low rate of interest, you may look for some other alternatives. Senior Citizen Savings Scheme for 5 years which pays 8.3% currently with a compulsory payback of quarterly interest, high quality corporate FDs which pay about 1% more interest with cumulative and non-cumulative options and debt mutual funds are very good alternatives. In fact, Debt MFs are something you should seriously look at due to their better returns, flexibility in investment and withdrawal, and tax efficiency. If you are ok with equity MFs, you can add about 10-20% of these also in your portfolio with at least 5 years’ perspective.

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Col. Sanjeev Govila(Retd)
Col. Sanjeev Govila(Retd)

Col. Sanjeev Govila(Retd)

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