14 Aug 2017 15:44 IST

How seniors can tide over falling rates

The five-year Senior Citizen Savings post office scheme scores well on returns

Senior citizens who rely mostly on interest income on their deposits to fund their living expenses have been hit hard. Rates on bank fixed deposits have plummeted over 2 percentage points over the past two years. But that’s not all. In a first since 2011, SBI recently cut rate on savings deposits by 50 basis points. Others have followed suit.

Adding to the heartburn of retirees is the sharp fall in rates of post office savings schemes.

So after the free fall in rates across segments, what are the best options for senior citizens in the fixed income category?

Humble post office, still

Even after the sharp fall in rates, post office schemes score over bank deposits in terms of returns. The five-year Senior Citizen Savings scheme (SCSS) offers an attractive 8.3 per cent interest rate. Being a fixed rate product, retirees can still lock into this rate for a five-year term. Interest under SCSS is payable quarterly.

On an average, bank deposits up to 5 years now offer 6.5-6.75 per cent. Senior citizens are offered 50 basis points above these rates across banks. Even so, given that both interest on bank deposits and SCSS are taxed according to the slab rate, post-tax returns work out better in case of the SCSS. Additionally, investment under Senior Citizen Scheme is exempt under Section 80 C, up to ₹1.5 lakh per annum. This bumps up post-tax returns.

Given that rates could be trimmed in the coming quarters, make the move fast. There is, however, a caveat. With rates bottoming out, you may not be able to cash in on better rates. But given that SCSS offers nearly one percentage point higher rate than most bank FDs, even if rates rise after two years, SCSS scores well on returns.

Bottomline: Move some of your low interest earning bank FDs to SCSS. However, do consider the penalty levied by banks for premature withdrawals.

Shop for higher rates

While SCSS scores over bank FDs, you may still prefer to park some of your money in bank FDs for convenience. Also, the maximum permissible investment limit under SCSS is ₹15 lakh.

Data on deposit rates over the last decade or so shows that investing in short-term deposits at the end of the rate easing cycle gives better returns.

So opt for deposits of up to two years. There are a few banks that offer higher rates.

IDFC Bank offers a 366-day deposit at 8 per cent and 1-2 year deposit at 7.75 per cent for senior citizens. Bandhan Bank offers 7.75 per cent for deposits up to two years. RBL Bank offers 7.9 per cent on its 1-2 year deposit.

Some non-banking finance companies also offer higher rates on their deposits. But since these companies offer only a tad higher return than the best bank FD rates, you can give it a miss.

Bottomline: Look for the best deals within bank FDs, but go for shorter, up to two years, tenure

Guaranteed pension

Most immediate annuities offer a modest 6-7 per cent return. But the recently launched Pradhan Mantri Vaya Vandana Yojana (PMVVY) offers 8 per cent return. However, it may not be enough to sustain your retirement expenses as it caps the maximum investment at ₹7.50 lakh, giving a monthly pension of ₹5,000.

Still, if you love the idea of rock steady income for the next 10 years, a portion of your surplus can be parked here, simply because it scores on returns.

Bottomline: If you are looking at predictability, this is one fixed rate product that you should have in your retirement kitty.

And some debt funds

For retirees, preservation of capital is paramount. Debt funds can also suffer capital losses. Hence, dabble in debt funds only if you are up to a bit of risk.

Liquid funds are relatively safer funds within the category. They are generally considered alternatives to savings account.

But if you have a time horizon of less than three years, returns in debt funds are taxed at the slab rates. Interest on savings accounts is exempt up to ₹10,000 under Section 80TTA of the Income Tax Act. Assuming 7 per cent return on liquid funds, post-tax returns work out higher than bank savings deposits. But given that debt funds, have suffered short-term losses, parking money in them for emergency, may not be advisable.

Instead, go with short-term debt funds that also mitigate rate risk, but offer tad higher returns. You can also claim indexation benefits on long-term capital gains tax, if you hold them for over three years.

Banking and PSU debt funds offer lower volatility in returns. These funds invest in good-quality debt instruments, mainly issued by banks and public sector undertakings. ICICI Pru, UTI and HDFC Banking & PSU Debt Fund have delivered 9-10 per cent annual return . Do note that returns may not repeat in the next two to three years, as rates are close to bottoming out.

If you are fine with more risk, go for debt-oriented funds investing 15-20 per cent in equities.

You cannot rely on debt funds for steady income, as there is no guarantee on dividends. Also, debt funds attract a dividend distribution tax of 28.8 per cent. Hence choose the growth option to grow your retirement corpus.

Bottomline: Dabble in debt funds only if you are up to a bit of risk. Don’t count on them for regular income

(The article first appeared in The Hindu BusinessLine.)

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