Investing options in India for fixed income

The most suitable for retired senior citizens from the multitude of investment options available today, would be the Senior Citizen Scheme 2004, Bank Fixed Deposits, Post Office monthly Income Scheme (POMIS) and GOI Savings (Taxable) Bonds, 2003. We are giving below a brief on their main features,

1. Senior Citizen scheme, 2004:

In 2004, the government introduced the Senior Citizen Savings Scheme. This scheme is available for not only those who are 60 years of age and above, but also those who are younger, provided they meet with certain eligibility criteria specified by the scheme. The numerical features are,

* Interest rate applicable: 9% per annum;
* Tenure: 5 years. However, you have the option to extend the term for another three years.
* Premature withdrawal: Possible. However, a penalty deduction of 1.5% of your investment amount is levied, if you withdraw the investment between 1 year to 2 years and 1% if you withdraw after 2 years.
* Maximum Investment Amount: Rs 15 lakh per depositor.
* Tax benefits: Nil
* Acceptable as collateral for a loan: No

2. Bank Fixed deposits:

With interest rates on Bank fixed deposits being hiked, they have once again become a lucrative investment avenue for senior citizens.

* Interest rte applicable: Depending on the tenure and the bank, interest rates generally range between 4.5 to 8.50% per annum. Additionally the interest rate applicable on deposits from senior citizens (i.e. individuals who are at or above the age of 60 years) is generally 25—100 basis points higher than that applicable to other deposits.
* Tenure: Depending on the bank, it can range from 7 days to even 10 years.
* Premature withdrawal: Possible. The interest rate payable would then be linked to the term for which the deposit was actually maintained.
v Maximum Investment Amount: No upper limit specified.
* Tax benefits: If the deposit is held with a scheduled bank for a term of 5 years or more, then, you get a tax benefit under section 80C. This section allows you to deduct a total consolidated amount of up to Rs 1 lakh from your taxable income against investments/payments made towards certain specified avenues, including bank deposits.
* Acceptable as collateral for a loan: Yes.

3. Post Office Monthly Income Scheme (POMIS):

POMIS does not hold any special benefit for senior citizens, it is meant to provide a source of regular income on a long term basis and is, therefore, beneficial for retirees.

* Interest rate applicable: 8% per annum.
* Tenure: 6 years.
* Premature withdrawal: Possible, but an mount equal to 2% of the initial investment will be deducted, if the account is closed within three years from the date of its being opened and 1% if withdrawal of investment beyond three years but before the maturity date, as per the prevailing rules.
* Maximum Investment Amount: Rs. 3 lakh in case of single account and Rs. 6 lakh for a joint account.
* Tax benefits: Nil
* Acceptable as collateral for loan: No.

4. GOI Savings (Taxable) Bonds, 2003 :

These bonds were launched by the Indian government in March 2003.

* Interest rate applicable: 8% per annum.
* Tenure: 6 years.
* Premature withdrawal : Not possible.
* Maximum Investment Amount: There is no upper limit for the amount that can be invested.
* Tax Benefits : Nil
* Acceptable as collateral for a loan: NO.

VK a 64-year old retired bank employee, was pleasantly surprised to know the current interest rate movements in the economy, several banks had hiked the interest rtes on bank fixed deposits. Now, several bank fixed deposits with a term of two years or more carried an interest rate of 9% per annum for senior citizens. This was good news, because, being retired, his appetite or high risk—high return instruments was negligible and he mainly relied on the returns earned through fixed income instruments for his sustenance.

Against the above backdrop, one can conclude that bank fixed deposits score higher than the other investment avenues mentioned, in terms of a combination of the interest rate (in case of a few banks), liquidity and tax benefits. However, the risk involved in their case is higher. This is because while the other three carry no risk of default as they are backed by the government, bank fixed deposits are insured with the Deposit Insurance and Credit Guarantee Corporation (DICGC) to the extent of only Rs. 1 lakh per deposit.

Further, diversify the portfolio of investments that enables one to earn good returns, facilitates regular income, is liquid and convenient to operate. And, with the choice of fixed income instruments that are now available this is feasible.

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