Ometimes life gives you these small shocks that remind you to be better prepared for the future. The government’s flip-flop on small savings rates is one such case. After announcing a cut of 40 to 110 basis points, he withdrew them, saying that the rates for the quarter from January to March 2021 would continue till June 30.
But now that the government has indicated its intention, it may be best for investors in these schemes to prepare for a possible cut next time. If you are a person over 60 looking for regular income options, here is a viable strategy to follow.
Max out scss
Even with major banks and NBFCs, the interest rate on deposits has fallen drastically, a government-guaranteed option that has been offering better rates is the Post Office Senior Citizen Savings Scheme (SCSS). The rates of the scheme, which were effective from 7.4% to 6.5% with effect from 1 April, have been retained at 7.4% for a further quarter. This presents a good opportunity for them to lock up.
SCSS account (which can be opened through India Post or leading banks) Total investors over 60 years. Allows to park up to 15 lakhs. It carries a 5-year lock and pays quarterly credits regularly. Once you invest in SCSS at a specific interest rate, you get the same rate for the next 5 years, making it a predictable option. As a conduit for central government lending, SCSS is safer than every other fixed income option in the market, including bank deposits.
Currently, major banks like SBI and HDFC Bank offer 5-year deposits of 5.8% for senior citizens, making SCSS’s 160 basis point premium quite attractive.
Bank deposit rates have already fallen and started increasing in the last three months. But these rates have a long way to go before catching up with SCSS, so it makes sense for senior citizens to maximize their SCSS contribution at Shs 15 lakh. If your spouse is more than 60, then your combined limit can go up to ₹ 30 lakh, along with your investment section 80C tax break will also be up to ₹ 1.5 lakh. Interest earned is taxable and subject to TDS.
Compared to other government-backed options offering similar rates, a major advantage of SCSS is that it offers breaking 5-year lock-ins. If you move out within a year, you go through all the interest, within 2 years you lose 1.5% and after 2 years, you lose 1%. But such penalties are worth it for the ability to withdraw money or invest in options during emergencies should interest rates climb very rapidly over the next few years.
Limit PMVVY risk
The Pradhan Mantri Vaya Vandana Yojana, a government-backed pension scheme provided by LIC, was scrapped last year. The scheme is open to more than 60 persons only, available till March 2023. It promises a taxable pension at monthly, quarterly, half-yearly or yearly intervals for 10 years in exchange for a lump sum investment. This is the minimum and maximum limits on your lump sum investment of ₹ 1.56 lakh and. 15 lakhs determines.
The interest rate on PMVVY is announced by the government at the beginning of every financial year. While the rate for FY22 is yet to be announced, the PMVVY interest rate is linked to the prevailing SCSS interest rate.
Now with the SCSS rate being 7.4%, it is likely that PMVVY will also offer 7.4% for FY22. Once you close in PMVVY in a financial year, you get a rate of return for the next 10 years.
This provides predictability, but if you are doing it now, investing at the bottom of the rate cycle can have a distinct disadvantage. Unlike SCSS, you cannot opt out of PMVVY in case of critical illness. So, if you have already increased your SCSS, then invest the additional amount in PMVVY for good returns, but do not try to use the full lakh 15 lakh limit.
Explore FRSBs
For regular income seekers (not just seniors) who want to wager on rising rates from here, the Government of India Floating Rate Savings Bonds (FRSBs), paying interest every six months, provides a good option. . The rate on these bonds is reset every half year on January 1 and July 1, at a 35-basis point premium over the interest rate on the National Savings Certificate.
RBI has already announced that the interest rate of FRSB will be 7.15% as on June 30, which is based on 6.8% rate of NSC. On January 1, now the NSC rate has been maintained till June 30, with the possibility that FRSB will continue to offer 7.15% for the remainder of this fiscal year.
Should interest rates rise next year, FRSBs will help you benefit from the gains given your floating reset. FRSBs carry a lock-in period of 7 years and are sold exclusively through designated branches of 11 nationalized and 4 private banks. Your holdings will be captured in the RBI bond ledger account and you will have to apply physically. Bonds only provide a payment option and interest is taxable. FRSBs have no set age limit of entry or maximum investment and you can use them subject to the ability to lock in money to supplement SCSS and PMVVY.
We are at a rock-bottom in the current rate cycle and inflation is raising its head and market interest rates. Therefore, it is not advisable to invest all your debt money in all the lock-in instruments mentioned above. Park at least 20% of your loan allocation into 1-year bank deposits and high-quality debt mutual funds, so that you can capitalize on better rates when available in six months or a year.
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