- Government-guaranteed post office schemes and GOI bonds offer good rates with absolute safety
- Keep emergency money in 1 year bank deposit
- Supplement with debt and equity funds for a return kicker
- Keep 30 % of your money in bank deposits to invest later
Finding safe investment options for your money is difficult even in ordinary times. But when you receive a large lumpsum in your hands which represents your life savings, the problem multiplies manifold.
The over 92,000 staffers who have opted for the Voluntary Retirement Scheme (VRS) from BSNL and MTNL are now faced with the challenging task of finding a safe parking ground for their money while making sure it earns reasonable income in a low interest rate environment. They need to factor in liquidity and tax efficiency too.
If you’re a VRS optee, don’t worry. Here’s a list of attractive investment options, ranked in the order of their safety.
Senior Citizen’s Savings Scheme (SCSS)
SCSS offered by India Post (you can open the account at many banks too) should be the top choice for any retiree looking for safe options today. While the scheme is normally open to senior citizens over 60 years of age, it does allow individuals who are 55 or more who have opted for VRS or superannuation to park their retirement proceeds. To be eligible before 60, you need to open your SCSS account within one month of receiving your retirement benefits. The SCSS is an absolutely safe scheme because it is Government of India guaranteed.
Interest rates on the SCSS are changed every quarter by the Government of India. For the current quarter (October 1 to December 31 2019) the interest rate is 8.6 per cent per annum, the highest you’ll find for any deposit option. This rate may change post December 31 but is still likely to remain attractive given the safety aspect. The SCSS accepts a minimum of Rs 1000 and allows an individual to invest a maximum of Rs 15 lakh. It is a 5-year scheme with regular interest payouts at quarterly intervals. It allows early exit with a penalty of 1.5 per cent after one year.
While the initial investment is eligible for tax exemptions under section 80C upto Rs 1.5 lakh, the interest is taxable and subject to TDS and tax beyond Rs 10,000 per year (Rs 50,000 of interest exempt for seniors beyond 60 together with other bank deposit interest).
National Savings Time Deposit
This fixed deposit from India Post (government-guaranteed) is available for 1, 2, 3 and 5-year tenures. It pays out annual interest. Interest rates on it are reset every quarter, with the rate for the current quarter (upto December 31 2019) being 6.9 per cent for the 1-to-3 year deposits and 7.7 per cent for the 5-year deposit. The minimum investment is Rs 100 and there is no maximum limit.
The 5-year deposit is the most attractive. It offers a high rate with 80C exemption for your initial investments upto Rs 1.5 lakh. Interest earned is taxable beyond Rs 10,000 a year (Rs 50,000 for seniors beyond 60).
National Savings Monthly Income Account (earlier POMIS)
This scheme, also from India Post, is open to investors of all ages but caps the total investment you can make at Rs 4.5 lakh for individual accounts and Rs 9 lakh for joint accounts. Interest rates are reset every quarter with the current rate at 7.6 per cent. The interest on this scheme is paid out monthly. It is a 5-year scheme, which offers premature exit after 1 year at a penalty of 2 per cent. It does not offer section 80C benefit on your investment. Interest received does not suffer TDS but is taxable.
GOI Savings Bonds 2018
A Central government guaranteed bond available on tap from SBI, the nationalised banks and three leading private sector banks, these bonds are open to all Indian citizens. The minimum investment is Rs 1000 and there is no maximum limit on how much you can invest. The bonds with a 7-year maturity, carry a 7.75 per cent rate of interest. They offer both a regular income option which pays half-yearly interest, and a cumulative option which pays you Rs 1703 for every Rs 1000 invested, at the end of 7 years. The investment does not earn any 80C benefit and the interest received is taxable and subject to TDS. The bonds are credited into a bond ledger account created in your name.
These bonds are not transferable and aren’t listed in the market. They do not allow you to exit early, though lower lock-ins are allowed for 60 plus investors.
The sovereign-guaranteed schemes mentioned above should be the preferred options for your regular income needs after retirement. However, post retirement, it is also important to have some readily accessible cash to meet sudden emergencies. We would suggest parking at least nine months’ worth of expenses in a bank FD that you can break at any time.
Given recent episodes involving banks, we suggest that you stick to the leading public or private sector commercial banks for these deposits. Avoid both co-operative banks and new small finance banks.
Unfortunately, after the recent steep fall in interest rates, leading banks offer low rates of just 6-6.5 per cent on fixed deposits. It is therefore best to park your money in up to 1-year deposits now, so that you can switch to longer term deposits when rates improve. The interest you receive is exempt from tax upto Rs 10,000 a year (Rs 50,000 for seniors) and is taxable beyond that limit.
While reputed NBFCs offer good deposit programmes with excellent service, such deposits are riskier than the schemes listed above. We therefore suggest that you turn to them only if you have surpluses left after exhausting the above options. Here again, given the low rates, we prefer deposits of 1-2 year tenure where moderate risk options such as Sundaram Finance and HDFC offer 7.25-7.5 per cent while Bajaj Finance (higher risk) offers 8 per cent. Diversify your deposits across 2-3 firms. Interest from NBFC deposits is subject to TDS and entirely taxable in your hands. Do watch out for our Recommended List of Deposits to keep track of changing options in this space.
For investors who expect to fall in the 20 or 30 per cent tax bracket even post retirement, tax on interest income from deposits can take a big bite out of returns. The Growth plans of debt mutual funds offer a tax-efficient route to set up regular cash flows through Systematic Withdrawal Plans (SWPs).
Such investors may therefore like to park some portion of their retirement kitty, after allocating to government schemes, in debt mutual funds. These funds however carry the risk of capital losses both from interest rate moves and credit defaults and it is important to choose them carefully to minimise both. Primeinvestor’s soon to be launched list of recommended funds will provide you with liquid and short duration fund options with low credit risk. These can be your preferred choices. We will also be reviewing them periodically and alert you, so that you know if you are staying with good funds.
Averse though you may be to market risks, you need your post-retirement portfolio to grow at inflation-matching rates to help you deal with rising expenses. Investing 15 -20 percent of your retirement portfolio in large/multi-cap equity mutual funds can meet this need. For this, you can park the money in the liquid funds (of the same AMCs in which you choose your equity schemes) and set up Systematic Transfer Plans into select large-cap or index funds. Do look out for our list of recommended funds, to be out in a few soon, for this purpose.
Don’t invest it all
Finally, given the low interest rates and high stock market levels today, we suggest that you don’t invest 100 per cent of your retirement benefits at one go. Do set aside at least 30 per cent of your VRS proceeds in a one-year post office time deposit or bank deposit, while deploying the remaining 70 per cent in the above options. We believe that the interest rate cycle will reverse higher over the next one or two years. Keeping some money on hand can help you capitalise on higher returns even from safe instruments then.
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