My mom is 73 years old. She has exhausted the Senior Citizen Savings Scheme as an investment option. She needs to invest another ₹15 lakh. Please suggest investment avenues other than FDs. Lock-in period can be around 5 years. I would like to explore RBI bonds, other tax-free bonds.

Senthil Kumar

Your mom has done the wise thing by using the Senior Citizen Savings Scheme (SCSS) as the first choice to park her savings. Though the interest rate on SCSS is also market-linked, it stands out in terms of the superior interest rates it usually provides, over bank deposits. Being offered by the post office, the SCSS is also risk-free as it enjoys sovereign guarantee.

On the fixed income side, she has two other options that can be considered risk-free, just like the SCSS. One, the RBI Floating Rate Bonds and two, the PM Vaya Vandana Yojana (PMVVY).

The RBI bonds today offer an attractive interest rate of 7.15 per cent. As the name goes, the interest rate is not fixed and will be reset every six months. The rate reset will be based on the prevailing interest rate on the NSC (National Savings Certificate) with a spread of 35 basis points over NSC.

These bonds have a tenure of seven years, which is close to the horizon of five years that you are looking at. Like the SCSS, the RBI bonds do not offer the cumulative option. The interest will be paid out every six months — on January 1 and July 1 every year.

The PMVVY is a guaranteed pension scheme from LIC. It is open for individuals who are over 60. It offers regular pension payments at a monthly, quarterly, half yearly or yearly frequency in return for an upfront investment (called a purchase price).

The scheme’s return is aligned to the SCSS rate at the beginning of the financial year in which the investment is made. Investors lock into this rate for 10 years, which is the tenure of the instrument. The rate for investments made in FY22 stands at 7.4 per cent. The scheme guarantees pension payouts for 10 years, with a return of principal at maturity. If you are not too strict about the 5-year horizon, you can park a portion of the corpus here.

In all the above options discussed above, the interest is taxed at slab rate of the individual. Tax-free bonds score on this aspect as the interest earned is tax-free. However, there are two things to note here. One, unlike the SCSS, RBI Bonds and PMVVY, tax-free bonds are not entirely risk-free. Though they are issued by public sector undertakings, it is better to stick to bonds with the highest AAA rating, to minimise the risk. Two, there are no primary issuance of tax-free bonds in the market currently and hence going to the secondary market is the only option. Here, the yield to maturity (YTM), rather than the interest rate, is what matters. You will get the indicated yield on the bond, provided you hold till maturity. If you sell before maturity, your return will also depend on the selling price vis-à-vis the price at which you bought the bonds, which could give you a capital gain or a loss.

You also need to choose a bond with good trading volumes to enable easier exit. Latest data (November 22) from HDFC Securities shows four AAA rated tax-free bonds from IREDA, IRFC, PFC and HUDCO, with residual maturity of 7-9 years, having YTM in the range of 4.55-4.97 per cent. Assuming a 30 per cent tax slab, options such as RBI bonds and PMVVY still score on post-tax returns.

You can restrict your choices to the RBI Bonds and the PMVVY.

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