Currently, the environment is not friendly for savers, as there is inflation because of supply constraints, and we have lower interest rates to support businesses and the economy.
The fall in the interest rate has been significant in the recent past. Those who are banking upon fixed income, especially senior citizens and retired, are facing most of the heat. This, at a time when inflation is also rising. Going by the decisions taken by the RBI over the past few months, the interest rate trajectory seems to go down further, at least in the near future.
However, the recent pandemic concerns and their impact on the economy may put the brakes on the RBI’s intention, albeit temporarily. “While it is obvious that interest rates will go up as the economic activity picks up in the country in the future, it is not likely to be so at least for the next 18-24 months due to the deep impact of COVID-19 and the resultant lockdowns. To make the matters worse, at least right now, the interest rates are down but the retail level inflation has moved up,” says Col Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm which caters exclusively to the armed forces officers and their families.
And, this low-interest rate regime is not in the best interest of the senior citizens. “Currently the environment is not friendly for savers, because we have high inflation, because of supply constraints, and we have lower interest rates to support businesses and the economy. Therefore it is very important for seniors to try and protect their capital from eroding away due to negative real interest rates,” says Rishad Manekia, Founder and MD, Kairos Capital Private Limited, a Mumbai-based financial planning firm.
What retired investors need to do
To make sure the funds are put to optimum use, the senior citizens need to ensure a few important things. Col Govila (Retd) suggests these:
1) Carefully work out the future requirements segregated into short, medium and long term corresponding to 3 years, 7 years and beyond respectively.
2) Short- and medium-term requirements should be invested into very safe investment avenues while long term requirements, should be split into safe and low risk investments.
3) All the investments should have a regular returns potential to cater to the senior citizens’ regular income requirements.
Investment options better than bank FDs
The bank fixed deposits have always been a popular choice with retired investors. However, they may not be the first choice for them. Pradhan Mantri Vyaya Vandana Yojana (PMVVY) and Senior Citizen Savings Scheme (SCSS) are two investments options most retired opt for while looking for safe and regular income. “PMVVY is a low-risk investment pension plan, with tenure of up to 10 years with the rate of interest fixed at 7.4% p.a. for the current quarter. It also offers tax deduction under section 80C,” says Col Govila (Retd) .
“SCSS has been there since long, it is a must-have investment option for senior citizens looking for long-term saving schemes which offer regular income, security and tax benefit. While investment in SCSS qualifies for deduction under section 80C, the interest of up to Rs 50,000 is exempt from tax under section 80TTB. The newly launched RBI Floating Rate Savings Bonds are also a good alternative with no limit on the investment amount and flexibility to take interest on a six monthly or yearly basis.” adds Col Govila (Retd).
While the maximum investment allowed under both the schemes – PMVVY and SCSS – is Rs 15 lakh individually, the duration of the scheme is different for each of them.
Difference between PMVVY, SCSS
Period of investment: What makes it a unique investment for senior citizens is that unlike SCSS, the PMVVY is for 10 years. For 10 years, the regular pension in PMVVY is guaranteed by the government. In SCSS, the guaranteed pension is only for 5 years. SCSS can, however, be extended after maturity for 3 years but the prevailing rate of interest will apply. As interest rates are looking to go down further, PMVVY scores over SCSS in this context.
Rate of interest: To invest in PMVVY, one has to approach LIC and invest either offline or online from the LIC website. In the case of SCSS, returns are fixed by the government at the start of every quarter of the financial year. Currently, for the quarter ending December 2020, the rate of interest on SCSS is 7.4 per cent per annum. On the interest rate front, SCSS scores higher as it carries a higher rate of interest than PMVVY.
Pradhan Mantri Vaya Vandana Yojana (Modified 2020) which had earlier closed on March 31, 2020, was recently extended by the government for another three financial years till March 2023. The scheme is for 10 years and on investments made in the FY 20-21 till March 31, 2021, the government has declared the interest rate of 7.4 per cent payable monthly i.e. 7.66 per cent per annum for the entire duration of ten years. For investments made in the next two FY i.e. 2021-22 and 2022-23, the government will declare the PMVVY interest rate at the start of each FY.
Frequency of returns: PMVVY is basically a pension scheme providing a regular income on monthly, quarterly, half-yearly annual basis. In SCSS, the only option is to get quarterly returns. A senior citizen has to accordingly decide based on the individual requirement.
Who can open: In both PMVVY and SCSS, only senior citizens of age 60 years and above can invest, however, in SCSS someone who has retired under VRS or superannuation can also invest but only the retirement benefits can be invested in such a case.
Tax benefits: The interest earned in both SCSS and PMVVY is taxable in the hands of the investor under the head ‘Income from Other Sources.’ SCSS, however, comes with tax benefit under section 80C thus scoring higher on the tax front compared to PMVVY.
Where to invest
After making a comparison between PMVVY and SCSS, rather than investing in any one of these two investment options, a senior citizen can consider investing in both PMVVY and SCSS. Do not consider one to be better than the other as requirements may differ. While the SCSS can be the first choice, a portion of the funds can also be invested for 10-years in PMVVY. Rest assured, both are backed by the government and carries a fixed return to meet regular income needs.