Fixed deposits may be better than senior citizen saving schemes in the current scenario.
Retirees receive a considerable amount from provident fund accumulation and superannuation and gratuity benefits. Many prudent ones would have accumulated a corpus through disciplined investing as well.
They must make many investment decisions to channelise the retirement corpus thus accumulated. The first decision will be to determine the asset allocation mainly between equity and debt. A 70:30, debt:equity ratio suits many but a proper analysis current investments and passive income streams must be done first. Debt gives stability to the portfolio and can be used to generate regular income streams to meet monthly expenses. Whereas, equity gives long-term returns and helps beat inflation.
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|COMPARING THE OPTIONS |
|Feature ||Fixed Deposits |
|Senior Citizens |
|Qualifying Age ||60 ||60 (55 for VRS or retired) |
|Term ||Differs ||5 yrs (extendable by 3 yrs) |
|Returns ||9 - 10% ||9% |
|Prematurity ||Approximately ||Penalty of 1.5% bet 1-2 yrs; |
|withdrawal ||1% penalty ||1% above 2 yrs |
|Taxation ||Interest added to |
income and taxed as
per slab applicable
|Interest added to income and |
taxed as per slab;
investment qualifies for
Section 80C benefit"
Fixed deposits (FDs), Senior Citizens Savings Scheme (SCSS) , Post Office Monthly Income Scheme, debt mutual funds and pension plans by life insurance companies are the various options available on the debt side. Of these, FDs and SCSS are your best bets in the current scenario.
The SCSS has been a huge hit since its launch in 2004, due to its attractive interest rate of nine per cent and sovereign backing. FDs, on the other hand, have been considered unattractive as their post-tax returns didn't even beat inflation. However in recent times FD rates have gone up considerably and can be considered as an alternative to SCSS. Most banks are offering FD rates for senior citizens between 9 -10 per cent. Before making a choice, retirees must consider the following factors.
Comparing the interest rates is probably the first step but not really a deciding factor. FDs are offering 0.5 - 1 per cent higher rates than SCSS, which essentially converts into a higher monthly income for you. A sum of Rs 15 lakh parked in SCSS will fetch you a monthly income (payout is actually quarterly) of Rs 11,250, whereas an FD with 9.5 per cent will give you Rs 11,875.
TERM AND WITHDRAWAL
This can be a big deciding factor. SCSS carries a term of five years and can be extendable by another three years, with interest rates prevailing at that time. Any premature withdrawal will attract a penalty of 1.5 per cent between one and two years and one per cent above two years. Whereas, FDs offer the flexibility of deciding the term in line with your convenience. Banks also give loans on FDs for emergency purposes.
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INCOME VERSUS ACCUMULATION
SCSS offers regular payout of interest rates on a quarterly basis. FDs offer regular interest payouts as well as the cumulative option. If you have a decent regular income stream (say house rentals or pension) you may not require additional regular income from investments in the years immediately following your retirement. In this case, opt for the cumulative option of FDs to grow the investment corpus. The compounding works well even with debt investments.
The returns from both instruments are taxable and get added to your income while calculating the tax. However, investments in SCSS are eligible for Section 80C benefits, where regular senior citizen FDs don't qualify (except tax-saver term deposits, typically with a five-year-plus tenure). So, if you fall in the taxable bracket and wish to avail of this tax benefit, SCSS works better. However, ensure you aren't already investing in other tax-saving instruments like life insurance or Public Provident Fund.
In conclusion: it makes sense to invest your retirement corpus in FDs to build your debt portfolio in this scenario. Make use of the prevailing high interest rate environment while it lasts, but only after evaluating all the factors.
The writer is a certified financial planner