By: Tavaga Research
Planning for old age is a long-term goal to ensure the desired freedom and financial stability post-retirement. It is the process of planning and managing your short term and long term finances in a way that ensures that you achieve your financial goals, both during your working years and retired life.
Without a judicious retirement plan, individuals run the risk of outliving their financial resources, disabling them to maintain the desired lifestyle you hoped for during their retirement. The other important risk is that of not being able to accumulate enough corpus owing to uncertain events such as disability, critical illness, and premature death.
More importantly, there is also an investment risk involved. The assets of the individual could decline in value or they could provide an inadequate return in relation to their financial needs and aspiration. People often postpone planning for retirement, thinking that it’s a way in the future. But investing in retirement during the early ages of life when the financial responsibilities are minimal helps reduce the burden of investment later in life.
Therefore, the most appropriate time to start investing for retirement is to start as soon as you begin earning. This will ensure that you are able to unleash the power of compounding over time, helping you accumulate a sufficient corpus while reducing your burden as the retirement age nears.
Below highlighted are some of the income-generating retirement schemes that can be availed of by individuals approaching their retirement or those who’ve already retired.
Pradhan Mantri Vaya Vandana Yojana (PMVVY)
The PMVVY is a pension scheme meant for senior citizens, offered by the Life Insurance Corporation (LIC) of India that gives out a guaranteed payout of pension at a specified rate for 10 years. It also offers a death benefit to the nominee of the scheme in the form of returning the purchase price.
So, if you are a senior citizen and have a lump sum of money to invest, then you can consider buying this immediate annuity scheme. The scheme had ended on the close of the last financial year, i.e. 31st March 2020, but the government decided to extend it by another three financial years till March 2023. To invest, individuals can contact any LIC agent or buy it from the insurer’s website directly.
PMVVY is available exclusively for individuals aged 60 years or above. The pension scheme comes with a guaranteed return on a monthly, quarterly, half-yearly, or annual basis for a duration of 10 years. The government has declared that all the investments made in FY21 in this scheme, will earn an interest of 7.4 percent payable monthly.
The maximum investment in the scheme is restricted at Rs 15 lakh per senior citizen and the maximum monthly payment is Rs 9,250 per senior citizen. So, the maximum monthly pension for spouses aged 60 or above is restricted to Rs 18,500 for an investment amount of Rs 30 lakh. The scheme is not age-dependent.
PMVVY- Investments and Pensions
| Mode of Pension | Minimum Investment | Minimum Pension | Maximum Investment | Maximum Pension |
| Monthly | 1,62,162 | 1,000 | 15,00,000 | 9,250 |
| Quarterly | 1,61,074 | 3,000 | 14,89,933 | 27,750 |
| Half yearly | 1,59,574 | 6,000 | 14,76,064 | 55,500 |
| Yearly | 1,56,658 | 12,000 | 14,49,086 | 1,11,000 |
All the payments for PMVVY are processed through NEFT or Aadhar Enabled Payment System and depending on the mode of pension, that is, monthly, quarterly, half-yearly or yearly, the first installment of the pension will be paid after a month, three months, six months or a year from the purchase date.
- What is the interest rate of PMVYY?
The Pradhan Mantri Vaya Vandana Yojana interest rate 2020 is 7.4 percent payable monthly PMVVY launch date
- PMVVY launch date
The scheme was first available for investment on 4th May 2017
- Pradhan Mantri Vaya Vandana Yojana Tax Benefit
Returns from PMVVY are taxed as per the existing laws, at the tax rate as applicable from time to time. The scheme does provide any deductions for tax under section 80C of the Income Tax Act, 1961
- Who can apply for PMVVY?
The applicant or the subscriber to the PMVVY scheme must be a senior citizen and an Indian citizen
- From where can an investor download the Pradhan Mantri Vaya Vandana Yojana form?
The Pradhan Mantri Vaya Vandana Yojana application form can be downloaded by clicking this link
- How do I open a PMVVY account?
The PMVVY account can be opened offline as well as online. For opening the PMVVY account online, one needs to visit the LIC website and fill in appropriate details. For the offline mode, the interested applicant should visit the nearest LIC Branch or meet a LIC agent
- How can I invest in Pradhan Mantri Vaya Vandana Yojana?
Once the PMVVY account is opened, the amount can be transferred online via net banking or a cheque can be deposited with the nearest LIC branch
Senior Citizen Saving Scheme (SCSS)
This is a government-sponsored saving tool for the senior citizens that allow them to save for retirement and earn quarterly interest payouts from the deposits. The central government introduced this scheme in 2004 with the intention to provide people aged 60 or above with a steady source of income for their post-retirement phase.
The scheme offers a substantial return to its subscribers. In addition, since the government backs this scheme the risk of the capital loss is minimal. The interest rate under SCSS is revised quarterly, depending on several factors including the prevalent rates in the market, inflation rate, etc.
Features of the Senior Citizen Saving Scheme
The most important feature of this scheme is that the interest rate declared during the time of the investment remains fixed throughout the maturity term and is not affected by changes in the later quarter. However, the scheme has a lock-in period of 5 years, which may be extended up to 8 years.
For instance, suppose an individual deposits Rs 5 lakh in the SCSS on the 1st January 2021, and the interest rate offered under the scheme for the fourth quarter of FY20 was 8 percent. Therefore, the deposit would accrue interest at 8 percent throughout the maturity period even, no matter what the interest rate is in the later quarters.
The minimum investment to open an account under the SCSS is Rs 1000, with a maximum investment capped at Rs 15 lakh. If an individual holds multiple accounts, the total deposits in all the accounts should not exceed the maximum limit.
Investors with the scheme can withdraw from their accounts prematurely after the completion of one year. However, individuals who close their account before 2 years will attract a penalty of 1.5 percent of the deposited amount. If the account closure happens after 2 years, the penalty will amount to 1 percent of the deposited amount.
Calculation of interest under the scheme
Under SCSS, the interest is compounded quarterly and disbursed on the first day of April, July, October, and January. The primary components of the interest calculations include the principal amount, interest rate, and the maturity period.
For instance, an individual deposits Rs 10 lakh under SCSS on 1 January 2021. In addition, suppose the interest rate offered in that quarter is 7.4 percent. The individual is eligible to earn an interest amounting to Rs (1000000*5*7.4%) or Rs 3.7 lakh. Since the depositor receives this interest every quarter, the quarterly income for the individual amounts to Rs (400000/20) or Rs 18,500.
The principal amount deposited under SCSS is eligible for deductions under 80C of the Income Tax (IT) Act, 1961, up to Rs 1.5 lakh. However, this is applicable only under the existing tax regime. The new and alternate tax regime introduced in Budget 2020 does provide this exemption.
- What is the current senior citizen savings scheme interest rate?
The current interest rate of SCSS is 7.4%
- How to invest in an SCSS?
SCSS account can be opened in a post office as well as the banks authorized by the government. Apart from all the public sector banks (banks owned by the government), ICICI bank offers the facility of senior citizen savings scheme
- Where can we find the senior citizen savings scheme application form?
The senior citizen savings scheme application form can be downloaded from the India Post website in the PDF format as well as from the websites of other authorized banks (A simple google search “SCSS Application form should work”)
- Which banks offer senior citizen savings scheme? Which bank is best for SCSS?
Most public sector banks along with ICICI Bank offer the senior citizen savings scheme. Also, India’s post office offers SCSS
- How can I invest in a senior citizen savings scheme?
The senior citizen savings scheme account can be opened by filling the application form of any authorized bank and post office with a minimum deposit of Rs. 1,000
Post Office Monthly Income Scheme (POMIS)
The post office offers a variety of deposit schemes for individuals looking to invest. These instruments are collectively known as small saving schemes. These schemes carry a sovereign guarantee, i.e. they are backed by the central government. Some of these schemes offer tax-saving benefits as well, under section 80C of the Income Tax Act, 1961.
Interest rates on these small savings schemes are reviewed and set by the government every quarter. The Post Office Monthly Income Scheme (POMIS) is one such scheme. It offers monthly income to its investors and is one of the highest-earning schemes with an interest rate of 6.6 percent.
Features of POMIS
POMIS, like other post office schemes, is validated and recognized by the finance ministry. The scheme has a lock-in period of 5 years and the maximum amount that can be invested under the scheme is Rs 4.5 lakh per individual. Even if you have multiple accounts at the post office, the aggregate deposits in all these accounts cannot exceed the maximum investment limit.
The minimum investment amount under POMIS stands at Rs 1500. In the case of a minor’s account, the maximum investment limit is Rs 3 lakh. For joint accounts, a maximum of 3 individuals can own a particular account, with each possessing equal rights over that account. The maximum investment limits for these accounts stand at Rs 9 lakh per account.
Every citizen of India is eligible to open a POMIS account, however, that NRIs don’t qualify for this. In case an individual decides to withdraw the investment corpus before the lock-in period lapses, a penalty is levied depending on the time of such redemption. If the deposit is redeemed within the 1st and the 3rd year, a 2 percent penalty is levied, withdrawal between the 3rd year and the 5th years draws a charge equivalent to 1 percent of the amount.
POMIS Calculation
Suppose you make an investment of Rs 4,50,000 (maximum investment limit) with a maturity of 5 years and interest accrued at 6.6 percent annually. This provides a fixed monthly income of Rs 2,475. At the end of the lock-in period, depositors will get their principal amount back.
The interest earned on this scheme does not incur any Tax Deducted at Source (TDS), however, it does not attract any tax deductions under section 80C of the Income Tax Act, 1961. Moreover, the interest income from this monthly scheme is taxable in the hands of the investor.
- What is the interest rate of MIS (monthly income scheme) of post office?
The post office monthly income scheme interest rate 2020 is currently pegged at 6.6 percent
- Which scheme is best for monthly income?
Apart from the two schemes discussed above, the post office monthly income scheme also offers an attractive monthly income at the rate of 6.6 percent
- What is the maximum investment limit of MIS of the post office?
Every interested applicant to this scheme can invest up to Rs 4.5 lakh individually. However, with joint accounts, the maximum investment limit stands at Rs 9 lakh per account
- How to apply for the Post Office Monthly Income Scheme?
In order to apply for the post office monthly income scheme, the interested applicant should visit the nearest post office, collect the form, and submit it with relevant documents attached. Also, the form can be downloaded from the India Post website
National Pension Scheme (NPS)
The NPS is a government-sponsored pension plan that was launched in January 2004 for people working for the government. However, it was opened to all sections of the society in 2009. During their working life, the subscribers of the scheme are allowed to make regular contributions to the pension account. On retirement, the subscribers may decide to withdraw a certain portion of the corpus as a lump sum and buying an annuity with the remaining corpus.
Essentially, NPS is a defined contribution pension system where the contributions of the subscribers are invested in a mix of assets and the accumulated corpus at retirement depends on the returns from those investments. The returns are, therefore, market-linked, and dedicated fund managers are entrusted with the task of managing the subscriber’s money.
Specifics of NPS
Under the scheme, an investor can open two accounts, namely Tier I and Tier II account. Tier I account is a non-withdrawable permanent retirement account, while Tier II is a voluntary withdrawable account. The minimum contribution in the Tier I account is Rs 500 for every transaction. For Tier II account, the minimum contribution for account opening is Rs 1000 and Rs 250 is charged for all subsequent transactions.
Subscribers in an NPS have two investment choices, namely the Active Choice and the Auto Choice. Under the Active Choice, the allocation choice lies with the investors, with a 50 percent cap for investment in equities. However, under the Auto Choice, the allocation is done as per a predetermined age-based formula. The allocations are made in 3 major asset classes including Equities, Government Securities, and Corporate Bonds.
On turning 60, subscribers can exit from the scheme but 40 percent of the corpus has to be used to purchase an annuity. If subscribers withdraw from the corpus before reaching 60, they will have to mandatorily contribute 80 percent of the accumulated corpus for purchasing an annuity. These conditions apply only to the Tier I accounts.
Investments of up to 10 percent of the basic pay plus dearness allowance or a maximum of Rs 1.5 lakh, whichever is lower, is deductible for taxation purposes under the current tax laws. From FY16, an additional tax deduction of Rs 50,000 is allowed for investments in NPS. However, only an investor in Tier I can claim the above benefits.
NPS Taxability
The scheme is currently subject to Exempt Exempt Exempt (EEE) Tax structure, where the contributions to the scheme and accumulations are not taxed, but the lump sum withdrawn from the scheme is, however, subject to a tax. The corpus used to buy the annuity is not subject to any tax. This implies that if a subscriber uses 100 percent of the accumulated corpus for buying an annuity, then he won’t be charged any tax.
Fixed Deposits
In India, fixed deposits are one of the most popular investment instruments to save money. It is one of the most preferred avenues that enable depositors to deposit a lump sum amount and provides a choice of tenure as per the convenience of the depositor. Once the deposits have been made at a specified rate of interest, it remains unaffected by interest rate changes in the future. Therefore, you get guaranteed returns on your deposits.
However, keeping in view that the benchmark interest rate is at its historical lows following the policy actions by the RBI to support the economy, these instruments seem unattractive, given the corresponding lower rates offered by FDs. At 4 percent, the repo rate is the lowest in at least 17 years.
Going forward, as the economy recovers from the pandemic shock and the inflation starts to creep up, it is highly likely that the central bank would reverse some of these reductions in the benchmark rate.
Therefore, it would be unwise for the investors to lock-in their money in long-duration fixed deposits. Investors can, however, deposit in FDs with a duration ranging from 12-18 months and reinvest the maturity amount when policy rates and the FD rates start going up, hopefully in 2022.
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