Interest rates have been falling, while food inflation is at 6%. The cost of living is, of course, much higher than what it was some years ago. But, what does it all mean? Well, to put it in a nutshell, it means the value of your money is going down.
With Fixed Deposit rates expected to go down further, these investments might not be enough to generate real after-tax returns for you. But, what are ‘real’ returns? Real returns are the returns you get from your investment minus inflation.
Let’s say inflation is at 6% and your Fixed Deposit investment is giving you 7%. It effectively means you are actually earning only 1% on your investment. Interest on your Fixed Deposit is taxed as per your tax slab. This means you will probably end up with less than 1% returns on your investment.
Given this scenario, senior citizens who survive on interest from their Fixed Deposits need to revisit their fixed-income portfolio to enhance their returns. However, they can’t afford to compromise on safety.
Additional Reading: How To Build A Rs. 10 Crore Retirement Corpus
Keeping that in mind, here are some fixed-income products that provide safe as well as decent returns.
Senior Citizens Savings Scheme
If you are currently aged 60 years and above, you could invest in the Senior Citizens Savings Scheme (SCSS). For those who have taken voluntary retirement, the starting age is 55 years. However, if you have retired from the armed forces, there is no age restriction.
The pros
- The minimum investment is a reasonable Rs. 1,000 and the maximum investment is fixed at Rs. 15 lakhs. You could make additional investments in multiples of Rs. 1,000.
- You can open the account by cash if the amount of initial deposit is less than Rs. 1 lakh, and by cheque if it is more than Rs. 1 lakh.
- The current interest rate offered is 8.6%, which is higher than other post office schemes.
- The SCSS has a maturity of 5 years, but can be extended by three years.
- Interest payout is done on a quarterly basis.
- Premature withdrawal is possible after one year, but you need to pay a penalty. For withdrawal before the completion of the second year, the penalty is 1.5% of the principal, while the penalty is 1% for withdrawals after the completion of two years.
- You can also open more than one account, but there should be a gap of one month between any two account openings.
- You can open a joint account along with your spouse.
- You can request for auto credit of interest to your post office savings account or receive it through post-dated cheques or money orders.
- Investments up to Rs. 1,50,000 in SCSS are exempt from tax under Section 80C of the Income Tax Act.
The cons
- Interest earned from SCSS is taxable. If the interest income exceeds Rs. 10,000 then the income will be subject to Tax Deducted at Source (TDS).
- There is no loan against this scheme.
- Those who took voluntary retirement, and are aged between 55 and 60 years, can only invest their retirement benefits.
- All your SCSS accounts put together should not exceed Rs. 15 lakhs.
Public Provident Fund
Public Provident Fund (PPF) was created by the Government with the objective of providing income security post retirement. The scheme has a maturity period of 15 years.
The pros
- The interest rate offered is 8.1% per annum, which is compounded annually.
- The scheme is EEE i.e. the principal invested, interest earned and the maturity amount are tax-free.
- The investment can be claimed as a deduction under Section 80C of the Income Tax Act.
- The PPF account can be opened with just Rs. 100 and the minimum deposit can be as low as Rs. 500 a year.
- Deposits can be made in instalments or as lump-sum in a year.
- The account can be extended in blocks of five years.
- You can retain the maturity amount in your PPF account without adding more money and without extending the tenure. This can be done once it has matured.
- You can transfer money from your savings account to the PPF account if both are held with the same bank.
- You can take a loan against your PPF account after the completion of three years.
- You can withdraw from your PPF from the 7th year onwards.
- You can open an account in the name of your child, but the maximum investment limit will be considered after adding balances in all accounts.
The cons
- Maximum deposit is restricted to Rs. 1,50,000 a year.
- The loan against PPF is restricted to 25% of the balance that was there in your account on the completion of the first year.
- The number of instalments is restricted to 12 a year.
- You cannot open a joint account.
- Interest is calculated on the lowest balance between the fifth and the last day of every month.
- Premature closure is not possible before the completion of 15 years.
Tips
- Depositing money between the 1st and the 5th of every month will earn you higher returns.
- Loan on PPF is charged at 2% above the PPF rate, which is about 10% presently. This is pretty low when compared to Personal Loans offered by banks.
Additional Reading: Looking To Invest In PPF? Here’s What You Need To Know
Corporate Fixed Deposits
At present, company Fixed Deposits could earn you as much as 11% for a 5 year period. Popular companies like Shriram Transport Finance offer 9% for 5 years and 8.75% for 3 years, which none of the banks offer. But, you must keep the following points in mind while investing.
- Company financials – Companies that pay regular dividends and have a healthy debt to assets ratio should be considered. Avoid loss-making firms.
- Ratings – Always invest in company deposits that have ratings of AA or higher. And keep track of the ratings during the deposit period as ratings are reviewed and revised frequently.
- Choose wisely – Financial agents often push company deposits as they offer higher commission. Don’t invest on their insistence. Do your own research or ask a financial advisor.
- Premature closure – Unlike other government schemes, premature closure is not easy for company deposits. There is no standard procedure and often no customer service. Some companies don’t entertain premature closures. Be ready to face delays when it comes to getting back your money.
- Go short – Choose short-term deposits of 3 years or less. This will give you the freedom to shift to better options and also review the situation to check whether it makes sense to invest in the same company. If you are investing for the long-term, keep track of the company, deposit ratings and company financials.
- Eggs in different baskets – Don’t invest in one company just because it offers high returns. Diversify your investments across companies from different sectors.
Additional Reading: Company FD vs Bank FD: Who’s The Winner?
Documents Needed
Here are the documents you might need in order to invest in the above products. You will require a copy of any of the following:
- Passport
- PAN Card (mandatory for SCSS and for investments over Rs. 50,000)
- Driving License
- Voter ID card
- Ration card
If you still think Fixed Deposits are the best investments, we have plenty of them. Our rates can go as high as 8.7%!