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D S Mehta
While the capital market is starved of funds and the corporates are feeling the pinch, the retail investor has become allergic to buying equity or even making deposits in private companies or non-banking finance companies (NBFCs). With bank deposits becoming unattractive because of the continuing fall in deposit interest rates, a direct consequence of the lowering of the lending rate, the choice of risk-free investments, particularly for elderly persons and those who have retired or are on the verge of retirement, has narrowed down considerably.
What considerations should a senior citizen weigh before making an investment? Obviously, the safety of the investment is the foremost priority. Investment schemes that are attractive from the point of view of returns or tax savings, though important, rank second. The chosen investment should provide an assured monthly income, which will help meet recurring expenses and also provide for contingencies such as illness and family commitments.
It is not advisable, atleast for the present, for senior citizens to invest in the primary or secondary markets or to deposit money in companies or chit funds or similar ventures, no matter how high the interest offered. The best strategy would be to spread the investment in multiple schemes. But what schemes should a senior citizen choose?
The most preferred long-term tax-saving scheme is the 15-year Public Provident Fund (PPF), which gives 12 per cent per annum, compounded interest yearly. The minimum deposit is Rs 100 and the maximum Rs 60,000, in a financial year. The deposits can be made in lumpsum or in monthly installments. They qualify for 20 per cent income-tax rebate on investment up to Rs 60,000 under Section 88 of the Income-Tax Act, 1961.
The investment is completely tax-free. Withdrawal is permissible every year from the seventh financial year onwards. Loan facilities are also available from the third year. No attachment can be made under a court decree. From the point of view of safety, returns and tax-saving,PPF is an excellent scheme. Individuals in the tax bracket of 30 per cent get a much higher interest rate than that offered on bank FDs. The government should remove the ceiling of Rs 60,000 to enable people to invest more in PPF accounts.
The next best investment scheme for senior citizens in the tax bracket of 30 per cent, who have already availed of the PPF scheme, is the 10 per cent tax-free five-year RBI Relief Bonds 1995.
For individuals in the tax bracket of 30 per cent, the pre-tax return on the National Savings Certificates VIII issue also works out to 17 per cent. The interest is 12 per cent compound six-monthly payable at maturity. Like PPF, NSCs also have a longer lock-in period as they cannot be encashed before the six-year maturity period. However, they can be pledged for borrowing. While the minimum deposit is Rs 100, there is no maximum limit.
Certificates are available in different denominations. Deposits qualify for tax rebate under Section 88 of the I-T Act. The interest accruingannually, but deemed to be reinvested, qualifies for tax rebate under Section 88. Such interest is also exempted under Section 80-L of the I-T Act.
For retiring government and PSU employees, there is a deposit scheme-1989 of the National Savings Organisation (NSO), with 10 per cent interest payable half-yearly. While the minimum investment limit is Rs 1,000, the maximum should not exceed the total retirement benefits. The interest earned is completely tax-free. An account can be opened within three months from the date of receiving retirement benefits. The entire amount or part can be withdrawn after the expiry of three years from the date of deposit.
Premature encashment can be made after one year from the date of deposit. The scheme is operated through State Bank of India branches and selected branches of nationalised banks.
For senior citizens in need of a regular income to meet recurring expenditure, there are two schemes, one offered by the National Savings Organisation (NSO) and the other by theUnit Trust of India (UTI).
In the postal monthly income scheme (MIS), Rs 130 is payable every month on a deposit of Rs 12,000. In addition, a bonus of 10 per cent is also payable after six years along with the principal amount. The minimum deposit is Rs 6,000 and the maximum Rs 2.04 lakh in a single account and Rs 4.08 lakh in a joint account. Though the maturity period is six years, the deposit can be prematurely encashed after one year at 5 per cent discount. There is no such discount if the account is closed after three years. The interest is exempt under Section 80L of the IT Act.
In the UTI Monthly Income Plan 97 (IV), there are two options-monthly income and cumulative. The duration is five years and the assured income is 12.5 per cent per annum for all five years with an annualised yield of 13.24 per cent. A re-purchase facility is available after three years. The minimum investment is Rs 10,000 with no maximum limit. Tax benefits are available under Sections 80L, 48 and 112 of the IT Act. There isalso exemption from capital gains tax. While it is a safe and attractive scheme, it is not tax-free and is subject to tax deducted at source (TDS).
In the case of both Indira Vikas Patras (IVP) and Kisan Vikas Patras (KVP), issued under NSO, the money doubles in 5.5 years. There is no limit on investment. The Patras are available at all post offices in different denominations. However, in the case of IVPs, no application is required and they are freely transferable and sold at half the face value. You can avail of premature encashment in KVPs. The compound yield in both cases works out to 13.43 per cent.
The National Savings Scheme (NSS) Account 1992 earns an interest of 11 per cent per annum. The amount deposited in a year qualifies for a rebate under Section 88. The deposit can be withdrawn after four years. The interest is exempt under Section 80L. Deposits are accepted in multiples of 100. There is no maximum limit. Deposits can be made at select post offices. There are also post office time depositschemes from 1-5 years with interest rates varying between 10.5 per cent and 12.5 per cent. After payment of tax, the interest works out to less than 9 per cent.
Under the UTI scheme US-64, a unit for face value of Rs 10 can be purchased for Rs 5. The dividend is around 20 per cent. In actuality, the interest works out to 13 per cent. If one is in the tax bracket of 30 per cent, the net interest rate is only 9 per cent.
To sum up, most savings schemes are subject to income tax and TDS. From the tax angle as well as that of returns, investments in PPF, NSC and RBI bonds are the most sensible options for elderly persons. However, if they need a monthly income for meeting recurring expenses, they can invest part of their savings in either the UTI monthly savings plan or the post office monthly income scheme, which are not only safe, but also give reasonable returns even after payment of tax.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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