Combine senior citizens’ FD with other instruments

Exhaust the post office scheme limit before investing in PM’s new scheme

Senior citizens looking for a regular monthly income will soon have an additional option to choose from. The new fixed deposit (FD) scheme announced by the Prime Minister in his speech on December 31 will offer 8 per cent interest for a period of 10 years. The maximum amount that can be invested is ~7.5 lakh. The interest will be paid monthly.

While other details like taxation, options for premature withdrawal and other conditions are not known yet, going by the sheer rate of return, this seems like a good option.

However, experts say that it should be combined with other savings products. “The interest rate is lower than the Post Office Senior Citizens Savings Scheme (POSCSS) which offers 8.5 per cent. But it runs the risk of reinvestment after five years. If investors have a clear 10year time frame to lock in at the 8 per cent rate, then it could be a good option,’’ says Anil Rego, Founder, Right Horizons Financial Services.

At 8 per cent rate, if the entire ~7.5 lakh is deposited, the annual income would be ~60,000 per annum or ~5,000 per month. The rate of return could even be higher because the interest will be paid on a monthly basis. It is a good option for those senior citizens who are in the lower tax bracket and are looking for secure and regular income, says Mimi Parthasarathy, managing director, Sinhasi Consultants.

With interest rates expected to be in the lower trajectory in the next two-three years and the threat of lower interest rates over small savings schemes looming large, such instruments could be lapped up by many senior citizens if there is more liquidity. At present, bank FDs have already started coming down. Banks usually offer senior citizens 25 to 50 basis points higher interest rate on FDs. Recently the Employee Provident Fund rate was reduced to 8.65 per cent from 8.8 per cent.

“Since the POSCSS currently offers a higher rate, a higher limit and shorter lock-in period, investors must first exhaust that limit before investing in the new FD. Investors whose bank FDs are closer to maturity and up for renewal can also opt for the new FD to take advantage of the higher interest rate,’’ adds Parthasarathy.

The income tax limit for senior citizens who are above 60 years and less than 80 years is ~3 lakh, while it is ~5 lakh for super senior citizens, that is, those above 80 years.

The taxability of the new FD is not known yet. But if it will be taxed like bank FDs, it will not benefit those in the higher tax bracket. However, fixed deposits over five years get benefits under Section 80C. So the investment is not taxed but the interest income is.

Financial planners say that investor who will face the tax axe on their income can also look monthly income plans of mutual funds as these would be more tax efficient, says Rego. “The MIPs have some equity portion and would be slightly riskier. But they will offer higher returns. Hence, investors can look at a combination of MIP and the new FD,’’ he adds.