Personal Finance

Want regular income? Go for post-office options

Eswarkrishnan Chellam | Updated on January 17, 2018 Published on July 10, 2016

Post-office instruments certainly have an edge over bank deposits. Time to invest is now

For senior citizens who can’t take risks, but need regular income, the Monthly Income Scheme (MIS) and Senior Citizens Savings Scheme (SCSS) from the post office fit the bill.

Why consider?

With the RBI cutting policy rates, banks have also been trimming their deposit rates. From around 9 per cent offered two to three years ago for fixed deposit of five-year tenure, rates offered by most banks have now dipped to between 7 and 7.5 per cent.

Rates of post-office instruments have also been falling. But they still have an edge over banks.

The MIS now offers 7.8 per cent per annum with monthly interest pay-outs, while the SCSS offers 8.6 per cent with quarterly interest paid out on the first working day of April, July, October and January.

With interest rates in the economy expected to be on a downtrend in the near to medium term, this is a good time to lock into higher rates offered by the post office instruments. Remember that rates on post-office instruments too will now be reset every quarter according to market rates. Hence, the earlier you lock in, the better.

Eligibility

The MIS is open to individuals without any age restriction. It can be opened by a single individual or jointly (up to three persons).

On the other hand, investors in SCSS must be 60 years or above. However, individuals between 55 and 60 years who have retired on superannuation or under VRS can open an account too. Two conditions apply in this case — the investment must be made within a month of receipt of retirement benefits and the amount cannot exceed that received as retirement benefits.

Prospective investors can walk into post offices with their identification and address proof, PAN card and two recent photographs for KYC requirements. Those not having PAN can submit Form 60 or 61.

Both accounts can be opened in Indian rupees, have a lock-in of five years and are not open for investment by HUFs and NRIs. The lock-in period commences from each transaction date. While any number of accounts can be opened, an upper cap on total investments remains, which is calculated by adding balances in each, including minor accounts.

The minimum amount for MIS deposit is ₹1,500. Additional deposits can be made in multiples of ₹1,500. The maximum investment limit is ₹4.5 lakh for a single account and ₹9 lakh for a joint account.

On the other hand, for SCSS, the minimum investment is lower at ₹1,000. Additional investments can be made in multiples of ₹1,000, with a cap of ₹15 lakh. Deposits below ₹1 lakh can be made in cash or cheque, but those above can be made only through cheque. Investments are eligible for deduction under Section 80C of the Income Tax Act.

For both accounts, post office savings banks need to be opened to credit interest.

Similar to most banks, the SB account offers 4 per cent interest. Minimum balance is ₹50 for those who do not want a cheque book and is ₹500 for those opting for a cheque book. An ATM card is provided, but can only be used to withdraw cash sparingly. For instance, Chennai has only five service locations where the ATM card can be used.

Tax will not be deducted at source for the MIS. But depending on their total income from various sources, investors will be liable to pay tax as per slabs applicable to them. For SCSS, TDS will be deducted if the interest income exceeds ₹10,000 per annum. If your income is below the taxable limit, you can avoid TDS by submitting Form 15H.

Liquidity and rollover

Premature withdrawal is allowed for both schemes after one year, but penalties apply. If MIS is encashed between the first and third year, a deduction of 2 per cent is made on the deposit amount. Between the third and fifth year, the rate reduces to 1 per cent.

SCSS, if withdrawn between the first and second year, a 1.5 per cent deduction against the deposit applies. Between the second and fifth, the penalty reduces to 1 per cent. If prematurely closed, investors may also lose their 80C tax benefit claimed earlier. After the initial five-year period, the account can be extended for another three years and closed after a year.

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