- Wealth PMS (50L+)
Once you hang up your boots, generating a steady income during your retirement years is a crucial requirement, especially if you aren’t privileged enough to receive an inflation-adjusted pension. Here are a few relatively safe avenues for those looking for secure options to generate a post-retirement income stream. We have ignored bank deposits, given the low-interest rates on offer. We skipped Post Office Monthly Income Schemes for the same reason.
In this two-part post, we first lay out the available options for regular income after retirement, then get into asset allocation, tax-efficient income generation, and risk.
The six regular income investment options are listed here in ascending order of preference:
An immediate annuity is a product offered by insurance companies. You pay a large sum of money to an insurance company. Per your requirement, the insurer provides a pension or a regular income (monthly, quarterly, half-yearly or annually). There is a 1.8% GST charged on the purchase price.
Immediate annuity products have many variants. We consider the return of purchase price to the nominee option because all other options mentioned above return the principal amount invested and mostly have a bi-annual interest payout. So, the comparison would be easier with options offering regular interest payouts.
For a person surviving till 2036, the yields on immediate annuities range from 5.2% to 6.3%. If the person lived till 2050, the yields are 5.4% to 6.5%.
Pension payouts are fully taxable in the hands of investors.
The yields are lower than other fixed-income and government bond options. Therefore, investors can mostly skip this option.
Given the recent rate hikes done by the RBI, many non-banking finance companies (NBFCs) have increased the interest on their deposits. They come in varying tenures. Bajaj Finance offers senior citizens the best rate at 7.6% for 44 months.
All of the above deposits carry the highest AAA credit rating. So, timely payment of interest and principal is assured. You also can take monthly, quarterly, or half-yearly interest payouts on these deposits, but the rates are a tad lower. Investors must note that the deposit insurance applicable to banks is not available for NBFCs, so there is a risk of default if the NBFC turns insolvent.
As with other options, the interest is taxed at your applicable tax slab.
Another fixed-income option for retirees is the RBI floating rate savings bonds 2020 (taxable) offering.
The interest rate in these bonds is not fixed but is pegged to the NSC rate (national savings certificate), plus an additional 0.35%.
Currently, NSC offers 6.8% per annum. So, the RBI bonds offer 7.15% currently.
Interest is paid out twice a year – in January and July. These bonds run for a tenure of 7 years. RBI taxable bonds are available for investment to both senior and non-senior citizens.
One advantage of this scheme is that there is no upper limit for investment as is the case of PMVVY and SCSS.
Premature withdrawals are allowed only for senior citizens. The lock-in period is reduced by one year for every slab of 10 years, starting from 60.
The interest paid is taxable at your applicable slab.
You can apply for these bonds at banks such as SBI, Bank of Baroda, HDFC Bank, ICICI Bank and Axis Bank, among a few others. You may have to visit a bank branch to buy these bonds.
These bonds are also available on the RBI Retail Direct platform.
In 2020, the government introduced a new policy (run by LIC) for providing pensions to senior citizens (aged 60 and above). The scheme has been extended till March 31, 2023. It is a non-linked, non-participating scheme that the government of India subsidizes. The interest rate on offer is 7.4% per annum.
Broadly, the scheme works as a deposit. You can invest up to Rs 15 lakh in it. For this amount, you will get a monthly pension of Rs 9,250.
So, you must invest Rs 15 lakh – the purchase price – to get monthly, quarterly, half-yearly or annual payouts. The interest rates applicable for different periods of payout increase marginally. The pension rates go up to 7.66% for yearly payouts. The table gives the details.
The investment is for ten years. At the end of 10 years, you get back the purchase price (Rs 15 lakh). In case of an unfortunate event before ten years, the purchase price is returned to the nominee.
The interest paid by the scheme is fully taxed at your applicable slab. There are no tax benefits or deductions available with this scheme.
You can close the account prematurely only for exceptional reasons, such as treating any illness for yourself or your spouse. The surrender value is set at 98% of the purchase price.
Senior citizen savings scheme (SCSS) is one of the most popular options for the retired to derive regular income. It is also among the safest. It is a scheme run by the government of India. SCSS is like a fixed deposit scheme with assured returns and no risks.
The interest rate on offer is 7.4% a year – it has remained at this level for two years. This interest is paid out every quarter. The interest rate is reviewed every quarter by the government.
You can open an account in a post office or a few select banks. ICICI Bank, State Bank of India and Bank of Baroda are some of the banks that offer the SCSS account to be opened with them. A visit to the bank branch is mandatory, as you can’t open SCSS online.
Only senior citizens can invest in the scheme. However, a couple of other categories of persons are also allowed to invest in the SCSS.
The latter two categories can apply subject to conditions. They should show proof of having taken voluntary retirement. And the proceeds from the retirement must be invested within a month of receiving them.
The maximum amount you can invest in an SCSS account is Rs 15 lakh. At 7.4%, you would receive Rs 27,750 every quarter as interest. These payouts are made in January, April, July and October, usually on the first day of those months.
The SCSS account runs for five years. You can extend it for another three years upon maturity, which can be done only once.
Investments up to Rs 1.5 lakh qualify for deduction under section 80C of the income tax act. Of course, this section competes with a host of other options such as home loan principal, PPF (public provident fund), ELSS (equity-linked savings scheme), provident fund, and five-year bank deposits, among others.
The interest earned is added to your income and taxed at the applicable slab.
Premature closure is allowed, but with penalties. No interest is paid for withdrawals within a year of opening the account. If you want to pull out the money between years one and two, 1.5% of the principal amount is deducted as a penalty. For years 2-5, withdrawals are penalized with 1% of the principal amount being reduced and the balance is paid out.
One of the relatively less-explored options is buying government bonds for their interest payouts that could serve as pensions for the retired. It is the safest investment, given that government securities carry no credit risk. Being guaranteed by the sovereign, you are sure to get the interest payouts.
Over the past year or so, inflation has been on the rise. After a prolonged pause, the RBI (reserve bank of India) increased rates twice in two months by a cumulative 90 basis points. Yields already inching up have shot up for government securities across tenures. Interest rates and bond prices are inversely correlated. So, the fall in bond prices has resulted in rising yields.
From about 6% levels in June 2021, the 10-year G-sec trades at a yield of over 7.6%. G-secs that are long-dated and mature years into the future – 2032, 2035, 2036, 2050 and even 2060 – are now available at attractive yields of 7.57% to 7.87%.
At these levels, the yields are higher than any other regular income option available, with complete safety. Note however that these yields change every day.
These government securities pay out interest twice a year, which can act as pension income for the retired.
There are some essential points to note here, however.
First, these bonds pay the coupon rate. Coupon rates must not be confused with the yield. For example, the 06.54 GS 2032 will pay a coupon of 6.54%. This will be the rate of interest payout. So, for a Rs 1 lakh investment, you will receive a total of Rs 6,540 a year in two half-yearly installments. But the yield is 7.57% because you can purchase the bond at less than the original issue price of Rs 100.
Second, the price you can buy a g-sec will decide your yield, which you must be aware of.
Third, you will get these yields only if you hold the bonds till maturity. You can sell the bonds earlier if you want, but that would mean you could end up with lower yields.
The interest payout on these bonds is taxed at your slab. You will pay capital gains tax on selling these bonds at the rate of 10% if you hold them for a year or more.
These bonds can be purchased via the RBI Retail Direct portal. Capitalmind already has a detailed post on the process to be followed for buying government bonds directly from RBI’s platform. You need to give details of your PAN number and complete the ‘know your customer’ (KYC) procedure. The g-sec bonds traded and prices are available from the Clearing Corporation of India website.
This post is for information purposes and should not be considered investment advice. We’ve evaluated the information available as of June 2022. The suitability of the investments mentioned above might change depending on new regulations.
Capitalmind Premium subscribers: Join the conversation on CM Slack