The Reserve Bank of India (RBI) has cut the repo rate five times this year. Banks, following suit have cut interest rates on loans as well as on an investment avenue favoured by many Indians – fixed deposits. Yes, the flipside to the lower interest rate regime is the fall in returns of fixed income products like the FD. The FD is a product that a lot of senior citizens and usually housewives depend on for regular income.
So, in a scenario where FD interest rates are declining, what are the options available for those senior citizens and retirees who depend on it to meet their financial needs?
Investment options available
Dr. Vikas V Gupta, CEO & Chief Investment Strategist, OmniScience Capital says, “Senior citizens and other individuals should look at traditional avenues such as PPF and small savings schemes as these schemes are offering higher interest rates. However, a word of caution in chasing higher interest rates due to the current situation in NBFC ad cooperative banks.”
Here are some investment avenues that are currently offering higher interest rates as compared to Bank FDs.
- Post office time deposits (POTD)
POTD are currently offering 6.9 per cent on one-three year tenure. A fiver year time deposit is offering 7.7 per cent which is higher than SBI’s five-year FD. SBI’s five-year FD is offering 6.25 per cent for general public and 6.75 per cent for senior citizens.
|Instrument||Current Interest rate||Payable|
|1 year Time Deposit||6.9||Quarterly|
|2 year Time Deposit||6.9||Quarterly|
|3 year Time Deposit||6.9||Quarterly|
|5 year Time Deposit||7.7||Quarterly|
|5 year Senior Citizen Savings Scheme||8.6||Quarterly|
|5 year Monthly Income Account||7.6||Monthly|
|RBI Savings Bonds||7.75 per cent||Half-yearly|
Unlike bank FDs, these time deposits come with a sovereign guarantee. Therefore, offering highest safety on the principal amount.
The interest on these deposits is payable quarterly. The interest earned on these deposits is taxed in similar fashion as interest on FDs with banks is taxed. Interest is taxed as per the income tax rates applicable to your income.
POTD does not offer any additional interest rate differential to senior citizens.
Also Read: How to open POTD account
- Senior citizen savings scheme (SCSS)
Another option for senior citizen is SCSS. The scheme is available with post offices and banks. One can invest maximum of Rs 15 lakh in the scheme. Currently, the scheme is offering 8.6 per cent. The interest is payable on the quarterly basis. The scheme is also backed by the government offering highest safety.
The interest received is taxable in the hands of the investor. However, one can avail tax benefit of up to Rs 50,000 under section 80TTB of the Income Tax Act.
Also Read: All you need to know about Senior Citizen Savings Scheme
- Post office Monthly Income Scheme (POMIS)
For those looking for monthly income option, can look at POMIS. Currently, the scheme is offering 7.6 per cent. The maximum investment amount is 4.5 lakh in a single account and Rs 9 lakh in a joint account. Unlike SCSS, which is available to senior citizens only, this scheme is available to every individual.
The interest earned is taxed as per the tax rates applicable to your income for FY 2019-20.
- RBI Savings bonds
Another option to look at is RBI savings bonds. These bonds are currently offering 7.75 per cent per annum. There is no maximum limit in investing in these bonds. The bonds have tenure of seven years.
Interest on these bonds can be earned on cumulative and non-cumulative basis. Under the cumulative option, the interest will be payable along with the principal at the time of maturity.
Under the non-cumulative option, the interest will be payable at the half-yearly interval from the date of issue.
To invest in such bonds, one can walk into any SBI branch, or select nationalised bank or private sector banks, i.e., ICICI Bank, HDFC Bank and so on.
Also Read: Important features of RBI 7.75 per cent bonds.
- Pradhan Mantri Vaya Vandana Yojana (PMVVY)
Another Government of India scheme for senior citizen is Pradhan Mantri Vaya Vandana Yojana (PMVVY). It is a pension scheme available for senior citizens for 10 years. The last date to apply in the scheme is March 31, 2020. One can invest in the scheme via LIC only.
Also Read: How to invest in PMVVY
If the individual opts for monthly pension, the interest rate he/she earns works out to be 8 per cent. Under the scheme, individual can get minimum monthly pension of Rs 1000 and maximum Rs 10,000. The maximum investment amount allowed in the scheme is Rs 15 lakh.
- Debt Mutual Funds
The most likely option for such investors is to move part of their borrowings to debt mutual funds. However, remember the interest rates fetched by the debt mutual funds are likely to be in line with the prevailing interest rates in the debt market, as is the case with any market-linked product.
Gupta says, “One can look at debt mutual funds especially gilt funds and short term debt funds with a duration of six months to one year. However, the returns on such funds are likely to be in line with the prevailing interest rates in the market.”
What you should do
According to an SBI report, it is estimated that currently there are about 4.1 crore senior citizen FD accounts with about Rs 14 lakh crore in aggregate parked in them. All this money could be hit when these FDs are renewed at a lower rate. For instance, State Bank of India announced a cut in its FD rates on Wednesday – this was its sixth cut in the year. For senior citizens, keeping money in FD for one year will now fetch 6.90 per cent. For other retail borrowers, the interest rate on such FD is 6.40 per cent. Other banks have also been cutting rates on FDs.
Although we are not suggesting you avoid FDs completely, it would be wise to have a judicious mix of various instruments. Gupta says, “One should diversify their investments:50 per cent in good three-four bank FDs even though they are offering lower interest rate and 50 per cent in avenues where you are comfortable in taking a risk on your principal investment amount.”
Keep factors such as liquidity, safety or risk, and taxation in mind while making your investment decision.