Today’s senior citizens definitely have more savings and investments compared to their parents, when they were retired, but the cost of living has multiplied manifold. Many of today’s retirees, unlike their parents, do not want to be financially dependent on their children’s earnings. While lifespan has increased, sky rocketing healthcare costs are also a serious concern for senior citizens. For senior citizens the four main investment considerations are:-
- Protection of capital
- Liquidity of investments
- Reducing income tax
- Keeping up with inflation
In this article we will discuss investment options for senior citizens keeping in these key investment considerations.
Senior Citizens Savings Scheme (SCSS):
This is one of best risk free investment schemes for Senior Citizen. The minimum investment limit in this scheme is
र 1,000 and the maximum limit is र 15 lacs. This investment qualifies for deduction under Section 80C of the IT Act. From a liquidity perspective, the scheme has a period of 5 years and carries an interest rate of 9%, one the highest applicable rates for similar instruments.
A penalty of 1.5% per cent is levied on the amount deposited, in case the deposit is withdrawn before 2 years and 1% if the amount is withdrawn after 2 years, but before the expiry of the term of the investment. While the returns of SCSS are taxable, if the returns from this instrument do not exceed the basic exemption limit of
र 3 lacs, seniors stand to earn tax-free returns.
Seniors who have their immediate liquidity concerns addressed though other instruments, should try to maximise investments under this scheme using their surplus funds, since this offers attractive returns and capital safety.
Post Office Monthly Income Scheme (POMIS):
This has been a popular investment option with senior citizens for many years. POMIS offers guaranteed 8.5% annualized returns to investors. The maturity period of these schemes is five years. Premature withdrawals are subject to a deduction of 2% of the amount invested if such a withdrawal happens within three years of investment. After three years, the amount of deduction is 1% of the amount invested.
The maximum investment limit in POMIS is only
र 4.5 lacs in one account in POMIS or र 9 lacs if the investor is investing in a joint account. There is no Section 80C benefit for POMIS investment. The interest income from POMIS is taxed as per the income tax slab of the investor. With rising cost of living seniors cannot rely on solely POMIS for their income needs. Nevertheless POMIS remains a good risk free investment option for senior citizens
Bank and Company Fixed Deposits:
Bank Fixed Deposits have always been seen as offering with safety and convenience. Currently the interest rate is in the range of 8 to 9.1%. However, the interest rates are likely to go down in the future as Reserve Bank India implements monetary policy easing. Investors should enquire about interest rates from multiple banks because it differs from bank to bank and can make a significant difference to the final return to the investor.
Interest earned by FDs is fully taxable at the applicable slab rate and tax is deducted at source. Fixed deposit issues from various companies offer higher interest rates than bank fixed deposits. However, such issues are limited and investors should note that they carry credit risk. Investors should check the credit rating of the companies before investing in the company FDs. Fixed deposits from companies rated AA and above are pretty safe and carry low default risk. Investors should be on the look for such issues, as these are good investment options.
Post Office Time Deposits:
Post Office time deposit is in many ways similar to Bank Fixed Deposits. The current annual interest rate for the five year time deposit is 8.4%. Minimum investment is
र 200, and there is no upper limit. Post Office Time Deposit qualifies for Section 80C deduction under Income Tax Act. The interest on Post Office Time Deposit is however fully taxable, as per the income tax slab of the investor
Mutual Fund Monthly Income Plans:
While capital safety is an important consideration when you are retired, with increasing life spans and high inflation, you cannot totally ignore equities. Mutual fund monthly income plans are excellent investment options for generating higher returns on your investment with limited risks. These plans invest 20 – 30% of their portfolio in equities, to boost the interest earned from debt investments with higher equity returns.
Senior citizens should consider liquid funds as an alternative to savings bank. While having an emergency fund parked in savings bank is essential from a financial planning perspective, if you can wait for a day to withdraw the funds, liquid funds are an excellent alternative to your savings bank account. While savings bank interest is usually around 4%, liquid funds provide returns in the region of 8 – 9%. Every bit of extra income is very useful for senior citizens.
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