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Investment planning in the sweet 60s gets trickier, given the absence of regular salary or pension for most people, as well as a reduced risk appetite. This is considering that senior citizens may have to depend on income from investments for at least a part of their regular expenses. For many, fixed deposits are a safe bet, with most banks offering senior citizens 0.25-0.5 per cent higher interest rates over the prevailing rates.
But today, bank deposit rates are not attractive across tenures. This is thanks to the continuous cut in repo rate since January 2019,which has led to a 25-100 basis points (bps) drop in FD rates during the same period.
At the current juncture the highest a PSU bank has to offer, on a five-year term deposit, for instance, is 7 per cent for senior citizens. Andhra Bank, Corporation Bank and Indian Bank all offer the same 7 per cent. Private players — IDFC Bank and Bandhan Bank — offer about a percentage point higher at 8 per cent for similar tenure. Though NBFCs offer higher rates than banks, it does not suit investors with lower risk appetite.Some of the small finance banks do offer good rates of 8.5-8.75 per cent and seniors can park some sums here. Nevertheless, given that their network may not be as wide as banks, ease of access to these banks may be an issue.
In comparison to the sharp fall that bank interest rates have seen since January, post office savings schemes have only seen a 10 bps drop in their interest rates in the three quarterly resets since January. .
The senior citizens savings scheme (SCSS) stands out in terms of providing superior returns, along with low risk quotient as it has sovereign guarantee.
It offers 8.6 per cent per annum, payable at quarterly intervals.
SCSS
As the name suggests, SCSS is restricted for senior citizens, that is for persons with the age of 60 years or more. The scheme comes with a standard five-year maturity period and the maximum amount that can be invested is capped at ₹15 lakh.
Nevertheless, early retirees — aged 55 years or above — who have opted for VRS or retirement on superannuation, can also open an SCSS account. This is, however, subject to the account being opened within one month of receipt of retirement benefits. Also, in this case, the maximum amount being invested in the scheme is capped at the amount of retirement benefits.
As an added advantage, the investment in SCSS is eligible for deduction under Section 80C of the Income Tax Act,1961.
Akin to interest earned on bank deposits, senior citizens can avail themselves of a deduction of up to ₹50,000 in an FY, for interest earned on post office schemes as well (under section 80TTB).
The basic exemption limit for income-tax purposes is quite high for senior citizens — at ₹5 lakh. That apart senior citizens enjoy several other deductions as well. Hence, investors who are not keen on further deductions under Section 80C, or those who have exhausted the ₹1,50,000 limit under the section, can opt for other pension schemes such as the Pradhan Mantri Vaya Vandana Yojana (PMVVY).
PMVVY
The PMVVY — a Centre-run pension scheme, operated by LIC — is open for investors till March 2020.
Under PMVVY, the investor has an option to choose the frequency of pension payments- monthly, quarterly, half-yearly or annually. The effective interest rate in each of these frequencies works out to 8 per cent, 8.05 per cent, 8.13 per cent and 8.3 per cent, respectively.
The maximum amount to be invested in PMVVY is capped at ₹15 lakh which will fetch a monthly pension of ₹10,000for 10 years. Hence, investors who have exhausted the limit in SCSS can park spillovers in PMVVY.
Evaluating in terms of tax perks, this scheme – though on par with an annuity paying insurance policy – is exempt from GST on the sum put in. For income-tax purposes, the pension amounts received under PMVVY are taxable under the head ‘income from other sources’.
Sandeep Jhunjhunwala, Director, Nangia Andersen LLP, says , “Despite being termed as ‘pension’ the monthly payouts cannot be taxed as Income from Salaries, as the same is not arising from an employer-employee relationship . Hence, the standard deduction of ₹40,000 (available on pension income) will not be available for PMVVY”. Investors also cannot claim the deduction of ₹50,000 (Section 80TTB) as in the case of interest income earned on bank FDs and Post Office schemes.
Liquidity
While FDs give investors multiple tenures to choose from, both SCSS and PMVVY are quite rigid. Funds will have to be locked in SCSS for five years, whereas in the case of PMVVY, it is for 10 years (policy term).
Premature closure in SCSS is permitted after one/ two years, post a deduction of 1.5 per cent and 1 per cent of the deposit, respectively.
PMVVY allows premature exit only under exceptional circumstances, like the pensioner requiring money for the treatment of any critical/terminal illness of self or spouse. The charges upon such premature closure works out to be 2 per cent of purchase price.
However, pensioners under PMVVY can, after the completion of three years of policy term, avail themselves of loan up to 75 per cent of purchase price. The interest on such loan shall be deducted on a half yearly basis from the pension payable. The current rate of interest on these loans is 10 per cent per annum.
The loan outstanding will be deducted from the claim proceeds at the time of exit.
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