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With interest rates coming down constantly over the years, senior citizens with limited corpus find it difficult to make their both ends meet. This is especially true when they do not have any means to supplement their income after retirement nor can they take any undue risk with their money. We discuss the investment avenues which are safe and offer better returns than fixed deposits of banks to senior citizens.

Senior Citizen Savings Scheme (SCSS)

An individual over 60 years can open a single or a joint account with spouse, under this scheme, with any post office or any designated bank. Non resident Indian (NRI) and person of Indian origin (PIO) are not eligible to invest in SCSS. Those who have taken voluntary retirement invest their retirement corpus in this scheme even before 60 years but after 55 years. Likewise, those who have retired from defence service, can also open account under SCSS anytime. In both the cases for opening account before 60 years, the account needs to be opened within one month from receipt of the retirement money.

Under this scheme, you can open one or more accounts during one or more years. However the maximum amount invested should not exceed 15 lakhs at any given point of time. The minimum amount for opening an account under SCSS is 1,000/-. The account under SCSS has an initial tenure of five years which you can extend once for three years. You can withdraw money after one year but with a penalty.

The rate of interest applicable for the accounts opened during the current quarter is 7.4% which is valid for full tenure of five years. The rate applicable is announced every quarter for accounts opened during that quarter. Though the government had withdrawn notification to reduce the interest rates on small saving schemes but sooner than later the rates will come down. So you should lock in your money with this interest rate as the interest rates are expected to come down. The payment of interest is made quarterly and the first interest is adjusted so as to make all the subsequent payments quarterly. Interest under SCSS is taxable and is subject to tax deduction at sources.

The amount deposited under this scheme is eligible for deduction under Section 80C. This benefit is significant looking at the fact that other avenues under Section 80 C like life insurance premium, school fee for children, payment towards pension plan, contribution to PPF account, ULIP, repayment of home loan etc. are no longer workable or attractive for senior citizens.

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

In addition to the SCSS, senior citizens have one more option to lock in their interest rate for next 10 year for another 15 lakhs by investing in “Pradhan Mantri Vaya Vandana Yojana (PMVVY)". This product guarantees a pension at 7.40% p.a. if opted for monthly pay-outs for next 10 years. You also have other options to receive pensions at quarterly, half yearly and yearly intervals and the effective rate goes up accordingly. This scheme is open only to resident Indian. It is managed by Life Insurance Corporation of India and can be bought online as well as offline.

Unlike SCSS there is no tax benefit for money deposited under this scheme. There is no provision for deduction of tax on annuity payments but the amount of annuity received by you is taxable and you will have to discharge the tax liability yourself. So in case you do not wish to avail the tax benefit under Section 80C, this product is better than SCSS from liquidity perspective.

You can withdraw money from this account before completion of 10 years but only under exceptional circumstances like for treatment of terminal illness or critical illness of the spouse or self but with 2% deduction from the principal amount. You can also avail loan up to 75% of the amount deposited by you after three years. The amount of interest on loans is adjusted against pension payable to you. Any amount of loan remaining unpaid shall be adjusted against the principal payable.

RBI floating rate savings bonds

After you have exhausted limit of 15 lakhs available under SCSS and PMVVY each, you can invest your retirement corpus in the floating rate savings bonds issued by the RBI with tenure of seven years. There is no age limit or the maximum amount up to which you can invest in these bonds. These bonds can be bought online and offline through the authorised banks. These bonds have a tenure of seven years after which the same are redeemed at face value.

Any person who is a resident of India can invest in these bonds. A resident who becomes a non-resident later on is allowed to continue to hold these bonds.

Unlike SCSS and PMVVY where the rate of interest gets fixed for the full tenure, the interest under these bonds keeps floating and the interest for a half year is announced by RBI in advance. Presently the interest rate is pegged at 0.35% higher than those payable on National Saving certificates (NSC). So any change in the interest on NSC shall automatically change the interest payable on these bonds. The interest on these bonds is taxable and subject to deduction of tax at source.

Individuals between the age of 60 and 70 are allowed to go for premature redemption of these bonds during the seventh year i.e. the last year of the bond’s tenure. The individual bond holder who is between 70 and 80 can go for early redemption anytime after five years and for those above 80 years can go for redemption after the bonds have run for 4 years. The premature redemption comes with a cost.

The writer is a tax and investment expert and can be reached at jainbalwant@gmail.com

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