On 15 May, the State Bank of India (SBI) launched a special fixed deposit (FD) for senior citizens called SBI We Care. On 18 May, HDFC Bank followed suit with its Senior Citizen Care FD. Both FDs offer an interest rate of 6.5% per annum for tenors of 5-10 years. Two days later, the Union Cabinet revived the Pradhan Mantri Vaya Vandana Yojana (PMVVY) which has a 10-year tenure, albeit at lower rates than the previous 8%. The new PMVVY offers a rate of 7.41% per annum in FY21 and the rate will be reset as per the Senior Citizen Savings Scheme (SCSS) rate every year.
How do these products stack up against one another and what are the other alternatives in the market?
At 6.5%, the new SBI and HDFC senior citizen FDs offer interest rates which are 0.75-0.80% higher than the corresponding rates for the general public. Normally, the rates for senior citizens are 0.50% higher than the general public. FD returns are certain, predictable and do not fluctuate according to the bond markets. The credit crisis in India since 2018 has highlighted the need for safety and certainty. Under the government's Credit Guarantee Scheme, your money in a bank is formally protected up to ₹5 lakh. But, historically, governments have protected even larger FDs in scheduled commercial banks. Even in the recent case of Yes Bank, FD holders were not subjected to losses, although they were temporarily hit by a limit on withdrawals. SBI also has the added advantage of government ownership.
While the comfort of fixed returns is reassuring, the trade-off is lower returns. One should also keep an eye on inflation. This can lower the real return on FDs. Real return is the interest rate minus inflation. FD rates are also taxed as per your income tax slab rate. Hence, if you are in the 30% slab, your actual return would fall to 4.55-5.18%.
First, you have the recently revived PMVVY scheme administered by the Life Insurance Corp. of India (LIC). It is called a pension scheme but works in a manner similar to an FD by providing you with a monthly or annual interest rate and returning your capital on maturity. This interest is fully taxable.
Second, there is SCSS, a government-run small savings product, which currently offers 7.40% per annum. SCSS has a tenor of five years, which can be extended by another three years. However, the upper limit for investing in SCSS is ₹15 lakh, the same as PMVVY. Investment in SCSS is also eligible for tax deduction up to ₹1.5 lakh per annum under Section 80C of the Income-tax Act, 1961.
SCSS offers the same rate as PMVVY but its lower tenor and tax benefits may make it more suitable to some investors. It is also more liquid than PMVVY.
“I have myself invested in SCSS through SBI. You can make this investment through some other banks also. Both SCSS and PMVVY are attractive for senior citizens. I would combine these with bank FDs which are more liquid," said Prakash Praharaj, founder, MaxSecure Financial Planners, a financial planning firm.
You can only withdraw from PMVVY before maturity in exceptional circumstances like critical illness. SCSS is more liquid. Withdrawal in the first year means no interest will be paid and withdrawal in the second year entails a 1.5% interest penalty. From the third year onwards, SCSS is aligned with banks as withdrawal attracts a penalty of 1%. However, the interest payout in SCSS is paid quarterly rather than monthly.
Third, you can invest in the Government of India (Savings Bond) which pays an interest of 7.75% per annum. It has a tenor of seven years and is open to all investors, not just senior citizens. Read more about it here.
The fourth alternative is to invest in debt mutual funds, if you have a higher risk appetite. They have been the subject of great controversy over the past year. However, relatively low-risk debt funds such as bank and PSU debt funds offer a yield close to 6.5%.
But remember that debt funds do not provide fixed returns. They are subject to interest rate and credit risk. However, investors in the higher tax brackets may derive a higher post-tax yield from them. They carry a major tax advantage for holding periods longer than three years. After three years, capital gains in these funds are taxed at 20% and the benefit of indexation is also provided.
What should you do?
Pick a basket of products rather than a single one, as per your time horizon and risk appetite. Financial planners have also suggested some equity allocation for senior citizens. “I would not worry too much about inflation at this point. But if the senior citizen has some risk appetite, he or she can put up to 20% in equities to keep up with inflation in the long term," said Praharaj. You should choose products based on your time horizon and risk appetite. Take advantage of the senior citizen products mentioned above if they fit into a well-rounded portfolio.