Retirement is an unavoidable stage of our life, which marks the end of the earning period for many. When we can not avoid something, we must plan for it. Retirees must plan for their retirement from an early age to steer clear of problems that may arise in their old age. We should plan our retirement by making the best use of the resources we have. We must plan in a way that minimizes our tax liabilities and guarantee us a regular stream of income after our retirement. We should also make sure that we do not outlive our retirement funds. Generally, a person retires at the age of 60, while life expectancy could be 80 years. But we should plan for any contingencies as well so that we have adequate income streams for any age. We must create our retirement portfolio using a mix of different financial instruments offered in our country.
Our preference of schemes also depends on whether we will receive a pension or not post-retirement. In case, we are eligible to receive pensions we can focus on directing our portfolio towards mutual funds which grow over time and can accumulate wealth for the post-retirement period. But if we are a self-employed or salaried individual who is not eligible to receive any pension, we should direct our portfolios towards investments that provide a regular source of income.
Now, let us understand few investment options through which a retiree can manage his monthly household expense. It should be kept in mind that a retirement portfolio should be a mix of these products, as per the requirements of the person.
Senior Citizen Saving Scheme (SCSS)
Senior Citizen Saving Scheme (SCSS) is a preferred fixed-income investment alternative for people who are above the age of 60. SCSS can be availed from a post office or a nearby bank. This scheme has a lock-in period of 5 years with an option to extend the tenure by 3 years. Any amount in multiple of Rs. 1,000 can be deposited under this scheme, subject to the maximum limit of Rs. 15 lakhs. The interest rate provided under SCSS is revised each quarter (once amount, the interest rates remain the same for the entire tenure). The interest rate for the 2nd quarter of FY22 (July-September) is 7.4%. Currently, SCSS offers one of the highest after-tax returns among comparable fixed income taxable financial products. The only drawback of this is scheme is that it charges a penalty on premature withdrawal of the deposited amount.
Bank Fixed Deposits (FDs)
Many people open Fixed deposit accounts keeping their retirement in mind. It is the safest financial instrument for investment that provides stable returns over time. Bank fixed deposits provide flexibility in terms of the tenure of deposits. Currently, interest rates on fixed deposits range between 6-7% (keeps fluctuating, so kindly refer to the latest rates). Interests earned on fixed deposits by senior citizens are allowed for deduction up to Rs. 50,000 during a financial year, under section 80TTB of The Income Tax Act,1961. 5-year tax-saving Fixed Deposit qualifies for deduction under Section 80C of the IT Act.1961 up to Rs. 1.5 lakhs (such deposits have a lock-in period of 5 years with early deposit not possible).
Post Office Monthly Income Scheme (POMIS) Account
POMIS is an investment scheme with a maximum cap of Rs. 4.5 lakhs under individual ownership and 9 lakhs under joint ownership. It has a tenure of 5 years. The interest rate is set each quarter and currently, it is at 6.6% p.a., payable monthly. The investment made in POMIS doesn’t qualify for any tax benefits and interest accrued on it is fully taxable. This is the biggest drawback of this scheme.
Pradhan Mantri Vaya Vandana Yojana (PMVVY)
PMVVY is specially designed for senior citizens and is offered by the Life Insurance Corporation of India (LIC). It is a low-risk investment pension plan with a tenure of 10 years and an interest rate of 7.4% p.a. Only a person above the age of 60 can participate in this scheme by making a lump-sum payment. To avail of the scheme amount invested should be less than Rs. 1.56 lakhs or more than Rs. 15 lakhs. The pension receivable under the scheme depends on the amount invested and ranges between Rs. 1,000 to Rs. 10,000 per month. Investments made under this scheme are not eligible for tax deduction under section 80C.
National Pension Scheme (NPS)
The National Pension Scheme can be availed by any individual belonging to the age group of 18-65 years. The tenure can be extended up to 70 years by senior citizens. Amount invested in NPS is eligible for tax deduction up to Rs. 1.5 Lakhs under Section 80C. Individuals are also eligible for the additional tax benefits of up to Rs. 50,000 under Section 80CCD. Depending upon the individual’s preferences, the investment made in NPS can be directed towards equity, corporate, and government securities. Individuals may also opt for other options available. NPS also offers various other benefits to users.
Mutual Funds (MF)
Mutual Funds are the best investment option for generating inflation-beating returns and tax savings. We can invest in Equity Linked Saving Schemes (ELSS), which qualifies for Section 80C deduction up to Rs. 1.5 lakhs. Depending upon the risk appetite of an individual, one may allocate a certain percentage into equity Mutual Funds with further diversification across different schemes available. Debt Mutual Funds can also be considered by the retiree due to their tax benefits as compared to bank deposits for those in the highest tax bracket. The retiree must be extra careful while investing in mutual funds to generate stable income rather than focus on high volatile returns.
Tax-free bonds are generally issued by government-backed institutions such as Indian Railway Financial Corporation Ltd., Power Finance Corporation Ltd. Etc. These bonds carry the highest safety ratings. They have listed securities on Indian stock exchanges. Tax-free Bonds are long-term investments and mature after 10/15/20 years. Thus, liquidity is low in these bonds. Though they are listed on stock exchanges still prices and volume are generally unfavorable for investors. They offer annual interest payouts, instead of monthly payments hence it may not meet a retiree’s regular income requirements.
|SCSS||Less Liquid||Stable Income||Current Interest Rate @7.4%||5-8 years||Allowed but penalty leviable||U/S 80C Of IT Act,1961|
|Bank Fixed Deposits||Provides Liquidity due to flexible tenures||Stable Income||Interest rate 6-7%||Flexible||Allowed with certain restrictions||U/S 80TTB & 80C Of IT Act.1961 (Lock-in period 5 years)|
|POMIS||Liquid Income but principal tied up||Stable Monthly income||Current Interest Rate @ 6.6%||5 years||Allowed with certain penalties and restrictions||N. A.|
|PMVVY||Liquid monthly income but principal tied up||Monthly pension||Interest Rate @ 7.4%||10 years||Allowed with certain penalties and restrictions||N. A.|
|NPS||Highly Liquid post-retirement||Monthly post-retirement pension||Annualized Return of around 9-12%||Stay invested till 60 years of age with various options||Allowed with certain restrictions||U/S 80C & 80CCD(1B) Of IT Act,1961|
|Mutual Funds||Depends on the type of MF||Debt MFs gives stable income, while equity MFs may be volatile||Averages around 10% annualized returns (subject to market risk)||Flexible||As per terms & conditions of the Agreement||ELSS qualifies U/S 80C|
|Tax-free bonds||Low liquidity||Pays out annualized returns||Generally, ranges between 7-8%||10/15/20 years||Allowed on certain bonds||Interest income is exempt from taxes|