These are tough times for senior citizens living off their debt investments. The interest rates on traditional fixed-income instruments have been coming down for some time now, while debt funds have been facing rating downgrades and defaults for months.
Now, State Bank of India (SBI), the country’s largest bank, has lowered interest rates on fixed deposits (FDs) by 20 basis points (bps) for tenures less than three years and increased rates by 30 bps for long-term FDs, but with conditions. One bps is one-hundredth of a percentage point. The new rates are applicable from 12 May. Interest rates on FDs of one year but less than three years, for example, are now at 6% per annum compared with 6.2% earlier for seniors. SBI offers 50 bps higher rates for seniors compared with regular depositors. In case of tenures above five years and up to 10 years, interest rates have been revised upwards. Seniors can get 6.5% per annum, which includes a 30 bps premium, over and above 50 bps given to seniors. However, if the FD is withdrawn pre-maturely, the additional 30 bps premium will not be payable.
SBI has revised interest rates on its FDs for the third time in two months. After SBI, even ICICI Bank cut rates on its FDs. Other banks may follow suit. While seniors prefer FDs with large or public sector banks due to safety, predictability of returns and liquidity, there are other low-risk options they can look at in the current falling interest rate environment.
Most financial planners are suggesting the Reserve Bank of India’s (RBI) savings bonds to seniors. “In the current interest rate scenario, these bonds offer 7.75%, making them an attractive option. What also works is that there is no investment limit in these bonds," said Deepesh Raghaw, founder, PersonalFinancePlan, a Sebi-registered investment adviser. The minimum investment in the 7.75% Savings (Taxable) Bonds, 2018, is ₹1,000. A senior can take the entire proceeds at maturity or opt for half-yearly payouts. RBI allows premature encashment for seniors, but the lock-in period differs depending on the age.
Another option for retirees is Senior Citizens Savings Scheme (SCSS) that currently offers 7.4% interest rate. SCSS has an investment ceiling of ₹15 lakh. For a senior couple, it would be ₹30 lakh. This scheme has a tenure of five years. Though it can be closed prematurely, the interest rate payout would be less.
Long-tenure post office FDs also offer better rates than SBI FDs—6.7% per annum for a five-year tenure. But do remember that if the depositor closes post office FDs 6-12 months from the date of opening, he will get only 4%.
Those in the higher tax brackets who can use the services of an intermediary can buy tax-free bonds from stock exchanges. These are long-tenured papers that government-owned companies had issued many years back, and are now available for purchase on exchanges.
MID- and SHORT-TERM
FDs work the best for medium and short terms. But within FDs, there are multiple options for seniors. They can look at FDs of non-banking financial companies such as PNB Housing Finance Ltd, LIC Housing Finance Ltd and HDFC Ltd. A senior can get between 7.45% and 7.85% for one-four-year tenures. Even some mid-size private sector banks such as DCB Bank and IDFC First Bank can offer similar or slightly higher returns, depending on the tenure.
When opting for FDs of small finance banks, financial planners said, seniors should go for a tenure of up to two years in the current environment and put in small amounts. Some of these banks offer up to 8.5% for FDs below two years.
Those in the tax bracket of 30% or above can look at safer debt mutual fund categories. “But do it only if there is need for more debt as per the asset allocation," said Melvin Joseph, founder, Finvin Financial Planners. He prefers overnight, liquid and well-managed and well-diversified ultra short-term funds.
Most of the low-risk traditional fixed-instrument products that give higher returns have a longer lock-in. Premature withdrawal can attract a penalty or result in lower rates. Seniors, therefore, need to segregate their investments. They must divide their investments among short-, medium- and long-term instruments, depending on their cash flow requirement.