Sometimes senior citizens or retired people require guidance on where to put their life’s hard-earned savings and derive a regular flow of income from the capital. There are multiple options. Here are a few:
The Pradhan Mantri Vaya Vandana Yojana, or PMVVY, is a social security scheme for senior citizens, implemented through the Life Insurance Corporation of India (LIC).
This gives an assured minimum pension. LIC invests the corpus in the market and generates market-related returns. If such returns are lower than the guaranteed return, the differential is subsidised by the Union government. This Scheme has been extended till March 31, 2023.
The assured rate of return has been set at 7.4% for 2020-21. Thereafter, it will be reset every year.
The minimum investment has been revised to ₹1,56,658 for an annually paid pension of ₹12,000 and ₹1,62,162 for getting a monthly pension of ₹1,000. The upper limit is ₹15 lakh of initial subscription.
The scheme also offers a death benefit in the form of return of purchase amount to the nominee. The minimum entry age for this scheme is 60 years, there is no maximum age limit. The maximum investment allowed per person is ₹15 lakh. The PMVVY scheme allows premature withdrawal only in the case of critical and terminal illness. However, only 98% of the purchase price is payable as surrender value in such a case. Loan facility is available against PMVVY after three policy years, up to 75% of the purchase price. There is no special tax benefit. You can buy a PMVVY pension from LIC. Policy term is 10 years.
The interest rate for Senior Citizen Savings Scheme (SCSS), since April 1, 2020, is 7.4%, paid out quarterly. Eligibility age is 60. A depositor may operate more than one account in individual capacity or jointly with spouse. There is an upper limit of ₹15 lakh in SCSS, and there is tax benefit under Section 80C of the Income Tax Act.
Maturity period is 5 years. The account can be extended for a further period of three years within a year of maturity.
Both PMVVY and SCSS are similar.
The interest rate is 7.4% (till next revision), and payout is quarterly in the case of SCSS and of your chosen frequency in PMVVY. SCSS has the added advantage of Section 80C tax benefit.
If the senior citizen has the funds, he/she should avail of both, subject to the upper limit i.e. ₹15 lakh each.
Post Office scheme
Interest rate for the Post Office Monthly Income Scheme has been reduced to 6.6% since April 1, 2020. The reason that the interest rate is lower than the previous two schemes is that the MIS is for everybody.
The government has a special dispensation for senior citizens, and gives a higher return in, say, PMVVY and SCSS. In MIS, the upper limit is ₹4.5 lakh in a single account and ₹9 lakh in a joint account.
Public Provident Fund
Usually, PPF is not viewed as a retirement planning avenue. However, in a falling interest rate regime, the factors that need to be considered are: the 15-year term can be extended in blocks of five years i.e. there is no limit on the term of a PPF; interest rate is usually on the higher side compared with the prevailing rate regime, currently it is 7.1%; tax-efficiency of the interest, apart from Section 80C benefit for contribution up to ₹1.5 lakh per year. You can also withdraw from the PPF as per rules.
This is a popular avenue as it is very simple and easy. The issue is, when interest rates are falling, fresh deposits are made at lower rates. Currently, deposits in State Bank of India for maturity of five to 10 years would fetch 5.4% and for senior citizens, it is 6.2%. There are banks that pay a higher interest rate, but the safety issue has to be kept in mind. Nationalised banks and leading private sector banks are safe but usually safer banks would pay a lower rate of return.
Mutual Fund SWP
You may invest your money in MF schemes as per suitability i.e. in debt and equity funds. Returns are market driven, there is no guarantee or commitment. A systematic withdrawal plan (SWP) gives you complete flexibility over how much you want to redeem per month/other frequency plus lump sum withdrawal as per requirement. Returns are tax-efficient over a holding period of three years for debt funds and one year for equity funds. In government-oriented schemes, your money gets locked in for that tenure.
(The writer is founder, wiseinvestor.in)