A de-risked income plan for seniors

Seniors no longer need to take on market risks to earn a decent regular income. Here’s a rejig plan

For the last three years, senior citizens looking for regular income have had to run from pillar to post to find investments that offered good returns with tax efficiency.

The shrinking menu of safe options had forced many of them to explore products such as equity savings schemes, arbitrage funds and balanced funds, even if they weren’t comfortable with market risks.

But there’s now light at the end of the tunnel. Interest rates on fixed income options are finally set to move higher after a three-year plunge. With official inflation rates climbing higher, the RBI has moved into pause mode since August 2017 and may even hike rates in the next one year. The bond markets are already factoring in rate hikes.

If the Sensex is the benchmark for the stock market, the 10-year government bond is the benchmark for the debt market. Its yield has already shot up by 130 basis points in the past year to 7.5 per cent now. When the interest rate on government bonds shoots up, all other borrowers in the market have to eventually follow suit.

Fixed income investors should, therefore, expect banks and companies to raise their rates in the coming months, to at least match the 10-year yield. The Budget has expanded the tax breaks on deposits and imposed a 10.4 per cent tax on returns from equity oriented funds.

After these changes, senior citizens can build a risk-free portfolio for their regular income, without having to lean on equity vehicles. Here’s how.

Maximise bank FDs

Given the likely uptrend in rates over the coming months, it makes sense for fixed income investors not to lock into very long-term debt options right now. Bank FDs, which are available for tenors as low as three months to a year, therefore, seem to offer the best vehicle for senior citizens. Most banks also offer their best FD rates in the one year or just over one-year buckets, with lower rates for longer tenors. This makes it ideal for investors to go in for six-month to one-year FDs at present.

The Budget has just made bank FDs more attractive by ushering in Section 80 TTB, which allows senior citizens (age 60 and above) an additional tax exemption for interest income of up to ₹50,000 earned from specified deposits.

This ₹50,000 interest income will also not suffer TDS for senior citizens. The exemption is available to commercial bank deposits, co-operative bank deposits and post-office deposits. Of the three, co-operative banks can carry risks and post-office deposits offer relatively low rates, with one year deposits offering 6.6 per cent this quarter.

Bank FDs offer better deals. Several new age private sector banks — for instance, Kotak Mahindra Bank, HDFC Bank, IDFC Bank — offer better deals for seniors. IDFC Bank offers 7.5 per cent on a 366-day deposit, Kotak Mahindra Bank offers a special 390-day deposit with a 7.35 per cent rate and HDFC Bank has 7.25 per cent on offer for one year. All of these banks offer quarterly/monthly interest payouts.

At a 7.25 per cent interest rate, a senior citizen can deposit nearly ₹7 lakh in such FDs to earn ₹50,000 per annum. Senior citizen investors who are in the tax net must first use this new deduction to maximise their tax-free monthly income.

SCSS still scores

While rates on most other options have been floating down, India Post’s Senior Citizens’ Savings Scheme (SCSS) has remained an island of high returns offering 8.3 per cent this quarter. Given that it is a hefty premium over prevailing market rates, it may be some time before other options catch up with it. SCSS also allows early withdrawal by investors after one year with a 1.5 per cent penalty. Therefore, senior investors can consider this scheme despite its slightly longer term of five years.

While the interest from SCSS is taxable, senior citizens with a total income of up to ₹3 lakh a year and are not in the tax net, will find this the best available rate. SCSS also remains a pretty good bet for senior investors who have overshot the ₹3 lakh basic exemption slab. As SCSS enjoys tax exemption under Section 80C up to ₹1.5 lakh a year, they can use it to reduce their taxable income to the basic slab. SCSS allows total deposits of up to ₹15 lakh per investor.

What next?

For senior investors who have exhausted these two options and still have surpluses, RBI’s new series of 7.75 per cent government bonds or NBFC FDs offer possibilities.

The RBI 7.75 per cent bonds, which have replaced the earlier 8 per cent series, score full marks on safety. Though the interest is taxable and subject to TDS, the rate is at a premium over market rates and attractive given the sovereign backing. They are available on tap from SBI and select nationalised banks in demat form. The only flip side is the lock-in period of seven years. But early withdrawal after six years is allowed for 60 to 70-year old investors, after five years by 70 to 80-year-olds and after four years for the 80-plus. This is a great option for your residual money if you prefer a hands-free approach. But given the rising rate cycle, this bond’s long lock in can lead you to miss out on higher rates over a year or two.

So, if you can take some risk, you can consider NBFC FDs. It is best to stay with AAA ratings and the shortest possible tenure of one year. For a good mix of safety with returns, some options are M&M Financial Services (7.5 per cent for one year), HDFC (7.4 per cent) and Bajaj Finance (7.6 per cent). The rates are not as attractive as the RBI bonds (which is unfair), but with a one-year tenure, you’ll have the flexibility to switch. The Budget has promised an enhanced limit on LIC’s 10-year fixed pension plan — Vaya Vandana Yojana — more PSU bond offers and a PSU debt ETF later this year. When these crop up, you can switch from these FDs to newer options.

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