ET Wealth | Best fixed income options for retirees

The bank fixed deposit (FD) is a favourite investment option among many, especially senior citizens. That is because they are considered safe and come with fixed, regular income.

However, with fixed deposit rates heading south, retirees who depend on regular interest income would be feeling the pinch. The solution lies in spreading the retirement corpus across multiple fixed income instruments to ensure a steady cash flow.

ET Wealth lists the best investment options before them.

1. Senior Citizens’ Savings Scheme

What is it: Government sponsored savings instrument aimed at providing senior citizens a steady source of income
Who is offering: Banks, post offices
Tenure: 5 years (lock-in). Can be extended by further three years (only one extension allowed)
Interest rate: 7.4% per annum. Rates reset every quarter. Once invested, rate remains constant for entire tenure
Payout frequency: Quarterly
Taxability: Interest income fully taxable. Deduction for invested capital upto Rs 1.5 lakh under Section 80C. Subject to TDS
Upper investment limit: Rs 15 lakh per individual. Amount cannot exceed that received as retirement benefit
Premature withdrawal: Allowed after one year of opening account, subject to penalty. Penalty is 1.5% of invested amount if closed after one year; 1% if account closed after two years
Good to know: Investment has to be done within three months of receiving retirement benefits. You can maximise benefit by putting Rs 15 lakh each in names of both spouses (Rs 27,750 interest per person per quarter)

2. Pradhan Mantri Vaya Vandana Yojana

What is it: Guaranteed pension product with death benefit for retirees
Who can invest: Individuals aged 60 years and above
Who is offering: LIC
Tenure: 10 years (lock-in)
Interest rate: 7.4% per annum on monthly payout (interest rate capped at 7.75% at anytime). Rates reset annually. Once invested, rate remains constant for entire tenure
Payout frequency: Monthly, quarterly, half yearly or annually. Minimum monthly payout is Rs 1,000; Maximum monthly pension is Rs 9,250
Taxability: Pension amount fully taxable. No deduction for invested capital allowed. No TDS applicable
Upper investment limit: Investment amount varies as per choice of payout frequency. Maximum is Rs 15 lakh (for monthly payout)
Premature withdrawal: Allowed under exceptional circumstances like treatment of critical or terminal illness for self or spouse. If policyholder dies during policy term, the purchase price will be refunded to the beneficiary
Good to know: Pension amount remains constant; doesn’t change with age. If both husband and wife are above 60 years of age, they can jointly claim up to Rs 18,500 as monthly pension

3. RBI savings bonds

What is it: Floating rate bonds issued only in electronic form
Who can invest: All resident individuals
Who is offering: RBI
Tenure: 7 years
Interest rate: 7.15% per annum (0.35% above prevailing NSC rate. Rates reset every six months
Payout frequency: Half-yearly (1 January and 1 July)
Taxability: Interest income fully taxable. No deduction for invested capital allowed. Subject to TDS
Upper investment limit: No maximum limit. Investment can done in multiples of Rs 1,000.
Premature withdrawal: Allowed for specified categories of senior citizens: After 6 years for 60-70 age group, 5 years for 70-80 age group, after 4 years for those above 80 years old
Good to know: RBI bonds are not tradable in the secondary market and also not eligible as collateral for availing loans

4. Post Office Monthly Income Scheme

What is it: Small savings scheme that allows the investor to generate monthly income
Who can invest: All individuals aged 10 years and above
Who is offering: Post Office
Tenure: 5 years (lock-in)
Interest rate: 6.6% per annum. Rates reset every quarter
Payout frequency: Monthly
Taxability: Interest income fully taxable. No deduction for invested capital allowed. No TDS applicable
Upper investment limit: Rs 4.5 lakh per individual. Rs 9 lakh for joint account
Premature withdrawal: Allowed subject to penalty (2% if withdrawn within 3 years, 1% if withdrawn after 3 years)
Good to know: Account continues to earn interest for up to two years after account maturity if proceeds are not withdrawn by investor. The applicable rate will be the same as that of a standard post office savings account

5. Tax-free bonds

What is it: Fixed coupon bearing instruments issued by government-owned firms
Who can invest: All resident individuals
Who is offering: Public sector undertakings
Tenure: 10, 15 or 20 years (at time of issuance)
Interest rate: 7-9% coupon rate (effective rate lower now owing to higher market price). Interest rate remains fixed
Payout frequency: Annually
Taxability: Interest income is tax free. No deduction for invested capital allowed. No TDS applicable
Upper investment limit: Up to Rs 10 lakh for retail investors
Premature withdrawal: Can be sold on exchanges
Good to know: Currently only available through secondary market. Investors can substitute tax-free bonds for fixed deposits as post-tax return is much higher

How to make most of Rs 1 crore nest egg
Here is how you should spread your investments to generate a monthly income of up to Rs 60,000
*For instruments that do not offer monthly income, amount adjusted to monthly basis