Coronavirus and the nationwide lockdown has taken its toll on the economy, which has had a ripple effect on the returns of various equity and debt financial products. Among those hit hardest by falling investment returns are senior citizens.
The bank fixed deposit (FD), a financial product that many seniors depend on for regular income, has seen its returns go below the 7 per cent mark. For instance, the State Bank of India (SBI), on May 27, cut FD rates across tenors by a whopping 40 basis points (bps) – a 5-10 year FD will now earn 5.4 per cent per annum. Even though few banks (like SBI, HDFC Bank, ICICI Bank) have launched FD schemes for senior citizens with higher interest rates, even the returns are these are below 7 per cent.
Further, the Reserve Bank of India (RBI) has stopped issuing its 7.75 per cent Savings (Taxable) bonds, 2018 from May 29, 2020.
In such a situation, where can senior citizens invest to get regular income?
Investment options for senior citizens
For senior citizen investors, safety and returns play an important role while choosing an investment vehicle. For that, they can consider fixed income products like the Senior Citizen Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY). Both offer returns over 7 per cent a year.
Raj Khosla, Managing Director and Founder, MyMoneyMantra says “These schemes offer the highest safety of money due to being backed by the government as compared to other financial instruments. Further, these schemes are offering returns higher than a bank fixed deposit of the same tenure.”
Here is a look at the features of these investment options.
A. Senior Citizens Savings Scheme (SCSS)
SCSS can be availed from a post office or a bank by anyone above 60, i.e., a senior citizen.
Interest rate on SCSS: The scheme is currently offering 7.4 per cent interest per annum for the April-June 2020 quarter. The interest rates on SCSS (and other small savings schemes) are subject to review and revision every quarter; the next review is due on June 30, 2020. However, if you invest now, you will earn 7.4 per cent until the maturity of the scheme account i.e. the interest rate on the date of investment in the scheme is locked for the entire tenure of the investment account.
Tenure of scheme: The tenure of a SCSS account is five years. Post maturity, the scheme account can be extended for another three years. The extension can be done within one year of maturity.
Investment amount: The minimum investment amount under the scheme is Rs 1,000 and the maximum investment cannot exceed Rs 15 lakh.
Interest payment: The interest amount will be credited on the first working day of April, July, October and January. Do keep in mind that the interest earned will be subject to TDS. Tax will be deducted if the total interest payment exceeds Rs 50,000 in a financial year.
Tax benefit: Investment in the scheme is eligible for deduction under section 80C of the Income-tax Act, 1961. Further, interest received from the scheme is eligible for deduction under section 80TTB of the Income-tax Act.
Premature closure of the scheme: The scheme allows premature closure of the account i.e. withdrawal of the investment. However, a penalty will be levied depending on the tenure of the account. If the account is closed before one year from date of investment, then no interest will be payable and any interest amount already paid will be deducted from the principal amount before repayment. If the account is closed after one year but before two years, then 1.5 per cent of the deposit amount will be deducted. If the account is closed after two years, then one per cent of the deposit will be deducted.
Comparison of SCSS, PMVVY and bank FD as per current interest rates and rules etc.
|Maximum Investment||Rs 15 lakh||Rs 15 lakh||No limit|
|Interest rate||7.4%||7.4%||Varies from bank to bank|
|Liquidity||Premature withdrawals are allowed by paying penalty||Premature withdrawals are allowed in special circumstances; loan facility is available||Banks allow premature withdrawal but normally a penalty is payable|
|Tax benefit||Investment is eligible for deduction under Sec 80C; deduction can be claimed on interest income under section 80TTB||No tax benefits are available. Pension received is taxable||Interest income from bank FD is eligible for deduction under section 80TTB|
B. Pradhan Mantri Vaya Vandana Yojana (PMVVY)
This is a pension scheme offered by the Life insurance Corporation (LIC) of India that gives a guaranteed payout of pension at a specified rate for 10 years. It also offers a death benefit in the form of return of purchase price to the nominee.
The scheme is available till March 31, 2023. LIC has modified the scheme and here are the details as per the life insurer’s website.
Interest rate on PMVVY: Investment in the scheme will now fetch 7.4 per cent per annum instead of 8 per cent earlier.
Tenure of the scheme: The scheme comes with tenure of 10 years.
Investment amount: The maximum amount that a senior citizen can invest in this scheme is Rs 15 lakh. Remember, the amount you want to invest will depend on the amount and frequency of pension income you want. The scheme offers minimum pension income of Rs 1,000 per month or Rs 12,000 per annum. The maximum pension is Rs 9,250 per month or Rs 1,11,000 per annum.
Minimum purchase price for pension at different frequencies
|Mode of Pension||Minimum Purchase Price (Rs)||Corresponding pension Amt (Rs)|
|Yearly||1,56,658||12,000 per annum|
|Half-yearly||1,59,574||6,000 every six months|
|Quarterly||1,61,074||3000 every three months|
|Monthly||1,62, 162||1000 every month|
Source: LIC Website
Maximum purchase price for pension payment at different frequencies
|Mode of Pension||Maximum Purchase Price (Rs)||Corresponding pension Amt (Rs)|
|Yearly||14,49,086||1,11,000 per annum|
|Half-yearly||14,76,064||55,500 every six months|
|Quarterly||14,89,933||27,750 every three months|
|Monthly||15,00,000||9,250 every month|
Source: LIC Website
Pension payment: As mentioned above, the amount required to be invested will depend on the frequency of the pension income that a senior citizen wants to opt for. A senior citizen can opt for monthly, quarterly, half-yearly and yearly payment of pension. Once a frequency is opted, it cannot be altered. The payment will start after a month, quarter, half-year or a year from the date of investment in the scheme.
Premature withdrawal of investment in the scheme: The scheme allows premature withdrawal under specific circumstances such as critical illness of the investor or spouse. In such a case, 98 per cent of the purchase price will be returned. Further, loan facility is available. The loan can be taken after completion of three years. The maximum loan that can be taken is 75 per cent of the purchase price.
Taxation: Unlike SCSS, that offers tax benefit at the time of investment and even on the interest income, there are no such tax benefits on the PMVVY. Further, pension amount received is taxable in the hands of the investors.
What should a senior citizen do?
Yes, these are safe products that come with relatively high returns. However, these are long tenured vehicles. Khosla explains: “These schemes come with long tenure, therefore, before investing, a senior citizen should take a ladder box approach. They should set aside the money to cover emergency expenses and other expenses that may arise in the future, and then the left-over money can be considered for investment in these schemes.”