If you already entered your retirement, then you understand that the main concern for people in their golden years is to generate enough income from investments to sustain one’s lifestyle and also to at least match inflation so that your wealth is not eroded. You don’t want to outlive your wealth.
For those of you who would like to ensure safe regular monthly income during your retirement without taking out a reverse mortgage on your home, there are certain government and corporate fixed income avenues you can consider that will generate monthly, quarterly and annual income, without the risk of equities.
Let’s see what these are:
1. Senior Citizen Savings Scheme (SCSS)
This is one small savings scheme that has attracted significant investments and will continue to do so as long as it offers a strong enough interest rate. Here are the salient features of the SCSS:
- With effect from 01st April, 2012, the interest rate offered here is 9.30% per annum, paid out on a quarterly basis.
- Minimum investment is Rs. 1,000, maximum investment is Rs. 15 lakhs. If you invest Rs. 15 lakhs in this scheme, you will receive Rs. 1,39,500 per annum, or rather Rs. 34,875 per quarter, pre tax. Considering a low tax bracket for senior citizens, this can be a very useful sum of money.
- TDS is deducted at source (for interest of more than Rs. 10,000 per annum). The investment in the SCSS is eligible for tax rebate under Section 80C (limit Rs. 1 lakh)
- You can open a single account, or jointly with your spouse.
- The SCSS matures in 5 years, and can be extended for another 3 years. Most people choose to extend, bringing the total tenure to 8 years for this scheme.
- NRIs and HUFs can’t open an SCSS account. Resident Indians who open an SCSS account cannot prematurely withdraw before 5 years, but they can prematurely close their accounts, but there is a penalty charged for premature closure (1.5% after 1 year, 1% after 2 years)
2. Post Office Monthly Income Scheme (POMIS)
While the SCSS pays out 9.30% per annum (payable quarterly), the POMIS pays out monthly income, which has greater value for people with no regular income stream. This greater value is offset by a lower rate of interest.
- The POMIS pays 8.50% per annum, payable monthly. The new interest rate is with effect from 01st April, 2012. It used to pay out a bonus on maturity (it matures in 5 years), but with effect from 01st December, 2011, the bonus has been stopped.
- Minimum investment is Rs. 1500 and multiples thereof. Maximum investment is Rs. 4.50 lakhs in a single account and Rs. 9 lakhs in a joint account. If you invest Rs. 9 lakhs in this scheme, you will earn Rs. 76,500 per annum, or Rs. 6,375 per month (pre tax).
- On the plus side, there is no TDS on the POMIS. There is also, however, no tax rebate for investments in the POMIS.
- NRIs and HUFs, as in the SCSS, are not eligible to open an account. Accounts can be opened by resident Indians, either singly, or jointly with one or two other adults. Minors can also have their own accounts with a limit of Rs. 3 lakhs.
- This is a good option if post retirement you are in the 10% tax bracket. If you are in a higher bracket, the returns might not be attractive enough to make this a compelling investment proposition.
3. Post Office Time Deposits
Interest here is not monthly or quarterly, it is paid out annually. So for the purpose of this assessment, this is the least useful of the 3 government schemes listed here. But it warrants mention because the interest while being paid out annually is compounded quarterly so you earn more than the stated annual rate.
- Time Deposits can be opened for periods of 1, 2, 3 or 5 years.
Per Annum Interest Rates are as follows:
1 year: 8.20%
2 years: 8.30%
3 years: 8.40%
5 years: 8.50%
- Minimum deposit is Rs. 200 and in multiples thereof, and there is no maximum limit.
- Interest income is taxable, but there is a tax rebate on the investments made in the POTD under Section 80C
- Accounts can be opened by individuals, either singly or jointly. As with other government post office schemes such as the SCSS, POMIS and PPF, NRIs cannot invest here.
With the current high interest rate scenario looking like it might change at any moment (SBI has just this week cut its deposit rates by 0.25%), the time is right to grab the opportunity and lock in to high yielding safe corporate FDs that offer quarterly, half yearly and annual interest pay-outs. Here are some corporate deposits you can look into, be sure to remember to speak to your financial planner to see if the investment is in line with your risk appetite and larger financial requirements:
1. HDFC Limited
The housing finance company is currently offering an interest of 9.65% per annum, payable monthly, for its Platinum Option Monthly Income Plan, for tenures of 15 and 33 months.
The non-cumulative quarterly payout option under the Platinum plan earns 9.70% per annum, payable quarterly. The same scheme with a half yearly pay out earns 9.80% for senior citizens. Cumulative options earn slightly higher rates, but do not serve the purpose of regular cash flows.
If Rs. 10 lakhs were invested in HDFC LTD – Platinum Plan monthly payout option, it would earn interest of Rs. 8,042 per month pre tax, which comes to interest of Rs. 96,500 per year, pre tax.
2. Mahindra and Mahindra Finance Limited
M&M is currently offering 10.00% (plus additional 0.25% for senior citizens) for their 36 month deposit, with a non cumulative payout i.e. interest would be paid out annually.
If Rs. 10 lakhs were invested in M&M, the annual payout would be Rs. 1,02,500 per annum pre tax.
3. Shriram Unnati Fixed Deposit
The 36 month deposit with Shriram Unnati quarterly payout option currently pays 10.34%, the half yearly options pays 10.47% and the annual option pays 10.75% interest. There is an additional 0.25% payable for senior citizens. The minimum deposit is Rs. 25,000.
If Rs. 10 lakhs were invested in Shriram Unnati FD, the annual payout would be Rs. 1,10,000 for senior citizens. The half yearly payout would be Rs.53,600 and the quarterly payout would be Rs. 26,475.
Do remember that all corporate FD interest is taxable. Also note that the aforementioned corporate deposits are used for illustration purposes only and this article should not be construed as fixed income investment recommendations. To know if you should invest in these or other FDs, do speak with your Financial Planner. Also note all the figures stated above are pre tax figures. Take your tax bracket into account before deciding where to invest.
It is worthy to note that we are currently in a high interest rate scenario and hence if your Planner suggests a safe, high yielding FD, then if you have the liquidity you should lock in for a longer tenure to save yourself the reinvestment risk as rates will likely go down going forward.
So where does this leave us in our quest for regular income?
Consider an individual who has a corpus of Rs. 54 lakhs to invest and needs regular income, the following split can be considered:
Senior Citizen Savings Scheme: Rs. 15 lakhs
POMIS: Rs. 9 lakhs
Corporate FDs: Rs. 30 lakhs
Assuming the corporate FDs were yielding an average of 10% per annum, this would bring in Rs. 3 lakhs per annum pre tax. The SCSS and POMIS would yield Rs. 34,875 per quarter and Rs. 6,375 per month respectively. Averaging out, this would be annual income of Rs. 5,16,000 per annum. Keep your tax bracket in mind when investing.
While these avenues will generate guaranteed and fixed income, there is also the option of relatively safe gains from debt mutual funds. Be sure to speak with your financial planner to ensure you get the right advice especially at a time when your capital must be protected.