- Senior Citizens’ Saving Scheme (SCSS)
Senior citizens who are above the age of 60 years can invest in the small savings scheme, Senior Citizen Savings Scheme (SCSS), and earn regular interest income. Interest shall be payable on quarterly basis and applicable from the date of deposit to 31st March/30th June/30th September/31st December.
There is a lock-in period of five years for the principal, but, premature withdrawal is allowed after the completion of one year but only after paying a penalty. Minimum deposit shall be Rs 1,000 and in multiples of 1,000, subject to maximum limit up to Rs. 30 lakh in all SCSS accounts opened by an individual.
The SCSS account can be opened singly or jointly with your spouse. Deposits above Rs 1 lakh will be accepted by cheque only. The scheme qualifies for tax break under Section 80C. Click here to read all about the Senior Citizen Savings Scheme.
- Post Office Monthly Income Scheme (POMIS) Account
POMIS is another small savings scheme, and it has a five-year investment term. The maximum investment limit is Rs 9 lakh in a single account and Rs 15 lakh in a joint account.Interest shall be payable on completion of a month from the date of opening and so on till maturity. The investment in POMIS doesn’t qualify for any tax benefit and the interest is fully taxable.With regards to premature withdrawals, this is what the India Post website states:
(i) No deposit shall be withdrawn before the expiry of 1 year from the date of deposit.
(ii) If account is closed after 1 year and before 3 year from the date of account opening, a deduction equal to 2% from the principal will be deducted and remaining amount will be paid.
(iii) If account closed after 3 year and before 5 year from the date of account opening, a deduction equal to 1% from the principal will be deducted and remaining amount will be paid.
(iv) Account can be prematurely closed by submitting prescribed application form with pass book at concerned Post Office.
Also read: Post Office Monthly Income Scheme higher investment limit from April 1, 2023: How to open POMIS account, interest rate
Most banks usually offer an additional interest of 0.50 per cent to senior citizens over and above the normal interest rates offered fixed deposits of different tenures. Fixed deposits interest is paid out to investors at regular intervals – monthly, quarterly, half-yearly, or yearly.
Unlike SCSS and POMIS, bank deposits provide flexibility in terms of tenure. Therefore, instead of locking funds for a particular duration, an investor may spread the amount across different maturities through ‘laddering’. It not only provides liquidity to funds, but also manages the ‘re-investment risk’. When the shortest-term FD matures, renew it for the longest duration and continue the process as and when various FDs get matured. While doing so, ensure that your regular income need is met, and deposits are spread across various maturities and institutions.
For those looking to save tax, the five-year tax saving bank FD could be a better option. The investment made here qualifies for Section 80C tax benefit. However, such a deposit will have a lock-in of five years and early withdrawal is not possible. Even though the interest income is taxable, there is a set-off by the amount of tax saved at least in the year of investment.
When one retires and there is a likelihood of the non-earning period extending for another two decades or more, then investing a portion of the retirement funds in equity-backed products assumes importance. Remember, retirement income (through interest, dividends, etc.) will be subject to inflation even during the retired years. Studies have shown that equities deliver higher inflation-adjusted returns than other assets.
Depending on the risk profile, one may allocate a certain percentage into equity mutual funds (MFs) with further diversification across large-cap and balanced funds with some exposure even in monthly income plans (MIPs). Retirees would be advised to stay away from thematic and sectoral funds, including mid- and small-caps. The idea is to generate stable returns rather than focus on high but volatile returns.
Debt MFs can also be a part of a retiree’s portfolio. The taxation of debt funds changed from FY 2023-24. According to the amended tax laws, investment made in specified debt mutual funds on or after April 1, 2023, would be taxed at income tax slabs applicable to your income at the time of redemption. For investments made up till March 31, 2023, the redemptions from such specified schemes will be taxed as per the holding period of the mutual fund schemes. If the holding period of the specified debt mutual funds is less than or equal to three years, then it will be taxed at the income tax slabs applicable to your income. If the holding period exceeds three years from the date of investment, then it will be taxed at 20% with indexation benefit.
A retiree can consider keeping a significant portion in debt funds also because of its easy liquidity.
- RBI floating rate savings bonds
The interest rate on RBI savings bonds is linked to the National Savings Certificate, which is a small savings scheme. The interest rate on RBI floating rate savings bonds has a spread of 0.35% over and above the interest rate on the NSC. Any change in the NSC interest rate will be reflected in the RBI bond’s interest rate. Unlike NSC, which is reviewed in every quarter, the interest rate on RBI savings bonds is reviewed half yearly. The minimum investment in these bonds start at Rs 1,000 with no limit on the maximum amount. The bonds have a fixed tenure of seven years. Premature withdrawals are allowed for individual investors whose age is 60 years and above, subject to minimum lock-in period depending on the age of the bond holder. These bonds do not offer to pay interest on a cumulative basis (at the end of the maturity of the bonds). The interest amount is paid out half-yearly on January 1 and July 1 every year.