SANJAY KUMAR SINGH Senior citizens should lock in returns at 8% for 10 yrs

For those concerned with the certainty of return, the Pradhan Mantri Vaya Vandana Yojana is a better option than Senior Citizens Savings Scheme; but the latter is more liquid

In a move that is sure to be welcomed by senior citizens, the Union Cabinet has approved doubling of the investment limit in the Pradhan Mantri Vaya Vandana Yojana (PMVVY) from ~750,000 to ~1.5 million. It has also extended the last date for subscribing to the scheme till March 31, 2020. The scheme was earlier scheduled to close on May 4. Here's a look at the pros and cons of this scheme vis-a-vis some of the other fixed-income options that can offer a regular income to retirees: Senior Citizens Savings Scheme (SCSS), Post Office Monthly Income Scheme (POMIS) and fixed deposits (FDs).

As far as the rate of return is concerned, SCSS pays 8.3 per cent, but the payouts are quarterly, which could cause slight inconvenience to senior citizens looking for a monthly payout. PMVVY pays 8-8.3 per cent, depending on the payout option — 8 per cent for monthly and 8.3 per cent for annual payouts. POMIS pays 7.3 per cent, while the 5-10-year FD from State Bank of India (SBI) currently pays 7.25 per cent to senior citizens. "FD rates are on the upswing. If interest rates continue to harden, FD rates could well cross the 8 per cent mark within a year or so," says Deepesh Raghaw, founder, PersonalFinancePlan.in. While smaller banks do offer a higher rate of interest than SBI, senior citizens should also bear the safety aspect in mind.

For senior citizens, a crucial consideration is the tenure for which they can lock in the rate of interest so that their monthly income does not decline in a falling interest-rate scenario. In PMVVY, a senior citizen can lock in the rate for 10 years while in SCSS, it is only for five years. "From a longer-term perspective, there is a bigger reinvestment risk in SCSS because of its shorter tenure," says Anil Rego, chief executive officer, Right Horizons.

Next, let us look at the quantum of investment. Earlier, the limit in PMVVY was ~750,000, and now it has been enhanced to ~1.5 million per senior citizen. A couple can invest ~3 million. This is at par with the investment limit in SCSS. In POMIS a person can invest ~450,000 individually, and ~900,000 jointly.

As for taxation, in SCSS a person is entitled to Section 80C deduction on the investment. In this year’s Budget, the government had introduced Section 80TTB, which entitles senior citizens to a deduction of up to ~50,000 on the interest earned on bank FDs.

Finally, let us look at the liquidity aspect. “It is relatively easier to exit from SCSS. You don't have to offer any reason for exiting. You can pay a small penalty and exit. Exiting PMVVY is not so easy. You can only exit it for a well- defined reason, such as a critical illness," says Raghaw. PMVVY, however, allows investors to take a loan against their investment.

Financial planners suggest that investors should calculate their post-tax rate of return and also take into account liquidity considerations before investing. "If a person is clear that he won't require the money, or will need it only partially, then he may go for PMVVY. On the other hand, if someone may require the full capital, he would be better off going for SCSS," says Rego. Investors in the highest tax bracket may also consider taxfree bonds, which are currently offering a yield to maturity of around 6 per cent in the secondary market.