Two popular and safe investment products such as bank fixed deposits and post office monthly income scheme come with the option of monthly returns.
Several investors, especially those who are retired, seek regular monthly income from their investments. While there are many safe investments that come with assured return, not all of them have the monthly payout option on the principal amount invested for a fixed tenure. Two popular and safe investment products such as bank fixed deposits and Post Office Monthly Income Scheme (POMIS) come with the option of monthly returns.
Post Office Monthly Income Scheme (POMIS)
POMIS has a tenure of 5 years. The rate of interest of all small savings schemes including POMIS is notified by the government from time to time on a quarterly basis. As the name suggests, the interest in POMIS is payable on a monthly basis, while the principal invested in paid back on maturity. Currently, for the quarter ending June 31, 2019, the interest rate is 7.3 per cent per annum. One can invest a maximum of Rs 4.5 lakh in single name while a maximum of Rs 9 lakh can be deposited in POMIS in joint name.
There is no tax at source (TDS) irrespective of the amount of interest earned, however, the income is fully taxable as per one’s tax slab. Also, there is no tax benefit such as Section 80C on the amount invested in POMIS.
How much monthly income: At the current interest rate of simple interest of 7.3 per cent, on a principal amount of Rs 5 lakh, the total interest comes to Rs 1,82,500, which yields Rs 3,041 as the monthly interest amount. If one maximises the upper limit of Rs 9 lakh, the total interest comes to Rs 3,28,500, which yields Rs 5,475 as the monthly interest amount.
Bank Fixed Deposit
Different banks will have varying interest rate for different tenure of deposits. The interest rate on a 1-year deposit may be different from a 5-year deposit. Although banks have the interest payout options of monthly, quarterly, half-yearly or annually, here we look at their monthly interest option. In case of monthly interest payout, interest is calculated for the quarter and paid monthly at a discounted rate i.e. interest received under monthly income option will be less than simple interest.
An example: FD of 390 days with monthly payout opened on May 18, 2018.
To compute the discounted value, the formula used shall be:
On completion of the month on 17th June , interest earned for the month shall be paid.
It shall be computed as (Amount*Rate/12).
Similarly, interest for the remaining completed months shall be computed and paid.
For the remaining days, it shall be computed as (deposit amount*rate*number of days/365) and paid on maturity.
How much monthly income: At an interest rate of 7 per cent, on a principal amount of Rs 5 lakh, the total interest comes to Rs 1,73,983, which yields Rs 2,900 as the monthly interest amount.
Additionally, if a bank is having an interest rate of 7.25 per cent per annum, (Discounted Rate of Interest of 7.21 per cent), then on a principal amount of Rs 5 lakh, the total interest comes to Rs 1,80,322, which yields Rs 3,005 as the monthly interest amount.
Look at your taxable income after factoring in interest income from various investment sources and try to keep it below the exemption limit. Make use of the 5-year tax saving bank FD to earn monthly income as well as to save tax. Diversify across SCSS and other regular income schemes including debt mutual funds and balanced funds to have a retirement portfolio that can also manage inflationary risks. A retiree’s retirement portfolio should be such that it can take care of reinvestment risk as well.