The choice of investment of one’s proceeds from an existing maturing FD depends on several factors. The primary consideration is the risk appetite of the individual. Another deciding factor is the benefits that are available for individuals who are retired or are closed to retirement. Fixed monthly income becomes especially important for individuals who do not have a stable source of employment. It is equally important for senior citizens who are in need of a fixed source of stable income which is extremely safe. When it comes to monthly income schemes, senior citizens are eligible for certain government-backed options that are extremely secure and provide interest rates that are marginally higher. Following is a list of investment options which are suitable for safe and steady monthly income:
The Monthly Income Scheme (MIS) offered by the Department of Posts (DoP) is among one of the most secure investment avenues backed by the Central Government. The rate of interest offered on this investment currently stands at 7.3%, which is among the best offered for safer investments like these. The interest is payable monthly commencing from the date of deposit. The minimum amount of investment is in multiple of Rs 1,500 and the maximum investment limit is Rs 4.5 lakh in a single account and Rs 9 lakh in a joint account.
The maturity period of Post Office Monthly Income Scheme is five years. An MIS account can be opened by an individual or by two or three adults with equal share of investment. These accounts come with an added nomination facility. One can open any number of accounts in any post office subject to maximum investment limit by adding balance in all accounts. Investors have the option to avail premature encashment in MIS after one year but before 3 years at a discount of 2% of the deposit and after 3 years at the discount of 1% of the deposit. A bonus of 5% on the principal amount is admissible on maturity in respect of MIS accounts opened on or after 8.12.07 and up to 30.11.2011, but currently there is no bonus payable on the deposits made on or after 1.12.2011.
Senior Citizens Savings Scheme (SCSS) is a deposit scheme for individuals who have attained the age of 60 years. Individuals retiring on superannuation or under any Voluntary Retirement Scheme (VRS), who have attained the age of 55 years but are less than 60 years, can also open the account, subject to certain conditions. From 1.10.2018, interest rate offered on SCSS is 8.7 per cent per annum and payable quarterly at the end of each quarter and the maturity period is 5 years which can be extended for further three years within one year of the maturity. Only one time deposit with a minimum of Rs 1,000 and multiple thereon is allowed on this account with the upper limit of investment being Rs 15 lakh.
A depositor may operate more than one account in individual capacity or jointly with spouse (husband/wife) subject to maximum investment limit by adding balance in all accounts. Premature closure is allowed after one year on deduction of an amount equal to 1.5% of the deposit & after 2 years 1% of the deposit. The deposits made in the scheme are exempt from income tax under Section 80C of the Income Tax Act, 1961. However, the interest earned on the deposit is not exempt from income tax. Provisions of Tax Deduction at Source (TDS) are applicable to the scheme.
Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a scheme meant for senior citizens and is aimed at providing social security during old age. The primary goal of this scheme is to provide senior citizens a stable income which is not affected by the change in interest rates. The scheme enables old age income security for senior citizens through provision of assured pension/return linked to the subscription amount based on government guarantee to Life Insurance Corporation of India (LIC). It offers a guaranteed interest rate of 8 per cent for 10 years. In the Budget 2018, the investment limit in PMVVY was increased to Rs 15 lakh from the existing Rs 7.5 lakh. The scheme was also extended till March 2020. The pension is payable at the end of each period, during the policy term of 10 years, as per the frequency of monthly/ quarterly/ half-yearly/ yearly mode as chosen by the pensioner at the time of purchase. The scheme has the benefit of pension payment and death payment along with maturity benefits. The minimum and maximum Purchase Price under different modes of pension withdrawals has also been fixed.
Fixed Deposit (FD) monthly income schemes are an ideal option for those investors who want to earn a regular fixed income with guaranteed returns at a certain rate of interest, every month. Depending on the scheme and banks, the duration of these deposits can go all the way up to 10 years. The option to withdraw the invested amount before the maturity is also applicable. The interest on these schemes is generally paid at a discounted rate for monthly payout FDs.
Below is a list of top banks’ monthly income FD schemes:
Investors can earn regular income from their investment in mutual funds through systematic withdrawal plans (SWP) where they can specify a certain fixed monthly payout which is paid at the designated date by redeeming units of the funds. These schemes come with both regular and dividend options, but the dividend payout is not guaranteed as it depends upon fund performance and market movements.
Apart from equity schemes, investors also have the option to choose from debt schemes. The tax treatment for the returns from both the schemes is different as for equity schemes, a 10 per cent long-term capital gains tax on gains in excess of Rs 1 lakh is applicable, whereas for debt funds long-term capital gains is applicable if they are held for more than three years and taxed at the rate of 20 per cent with indexation benefit. If debt mutual fund investments are redeemed before three years, the short-term gains are taxed according to the investor’s tax slab. There is also a Dividend Distribution tax (DDT) at the rate of 10 per cent on the dividend options of equity funds.
To sum it up, monthly income schemes vary from extremely secure options such as Bank FDs, Post office deposits to somewhat risky options such as mutual fund SWP. Individual goals and risk appetite should be the primary considerations for individuals while choosing one option over the other.
(By Rahul Agarwal, Director, Wealth Discovery/EZ Wealth)