Ask us: On investments

Q. I am a retired senior citizen, aged 71. Along with my wife, I have invested about 50% of my retirement corpus in leading public sector banks’ and NBFCs’ deposits. The balance is distributed across SCSS, LIC Vaya Vandana Yojana, PPF, RBI 7.75% taxable bonds. Some bank and NBFC FDs worth ₹30 lakh will be maturing shortly. The new interest rates are very low. Kindly advise any other secure investment option available for regular income with better returns as we are dependent on our interest income.

A. The ultra-low interest rates in the economy have allowed lenders to raise deposits at very low rates that don’t really compensate for inflation. We do think that the abnormally low interest rates will improve once economic growth normalises.

Presently it makes sense to invest mainly in Central government-backed instruments which carry the highest safety in terms of capital. We hope you have availed of the individual limits of ₹15 lakh both for yourself and your wife in the Senior Citizens Savings Scheme and LIC Vaya Vandana Yojana.

If you have done so, the other option you can look at are the Government of India’s new series of floating rate taxable savings bonds. These bonds offer half-yearly interest at a rate which is linked to the prevailing interest on the National Savings Certificates, with a 0.35 percentage point premium over NSC. These bonds are available on tap with no maximum limit on your investments. Presently, the bonds offer 7.15%, though this rate may change as NSC changes its rates. Given that, we think interest rates in the economy are close to bottom. The possibility of rates falling below 7% is quite low. To invest in these bonds, you need apply through physical application forms available at 14 designated banks that include leading ones like SBI and HDFC Bank. You can find the details of the bond and the application form here. The only negative with these bonds isthey have a 7-year lock-in period; but early withdrawals are allowed with penalty for seniors like you. Given the Central government guarantee, these bonds are among the safest instruments you can buy.

This apart, India Post’s National Savings Monthly Income Account is also a safe option to consider. This account with a 5-year lock-in allows up to ₹9 lakh investments in joint capacity. The interest rate is currently 6.6%. While this may not seem attractive, it is superior to the return on bank deposits at this juncture, for an instrument with higher safety. The account allows withdrawal after 1 year with a prefixed penalty.

After exhausting these two options, you can consider investing a limited sum (say ₹5 lakh) in floating rate debt mutual funds with good quality portfolios. While they carry market risks, their advantage is that you can get tax-efficient income by setting up Systematic Withdrawal Plans in such funds. If you aren’t sure how to choose the right funds, take the help of a qualified advisor.

Q. My mother (58) is a beneficiary of family pension. Her section 80C and 80D are full for tax purposes and I was looking to invest in NPS to get benefits under 80CCD. Please advise whether NPS is a good option?

A.NPS is an option for young people saving towards retirement rather than those on the verge of retirement, seeking a pension. It may not be suitable for your mother, as it is market-linked and carries risks to her capital. This apart, she cannot withdraw the entire amount you accumulate in the scheme in the form of a lump sum when she turns 60.

As much as 40% of the maturity proceeds need to compulsorily go into an annuity scheme, which is likely to provide low returns, that are moreover taxable. As your mother is set to soon turn 60, there’s also very little time to accumulate enough money in NPS to meet her requirements.

There are, frankly, not too many options beyond Sections 80C and 80D to reduce the tax outgo. If you have not availed Section 80 TTA, you can park some money in savings accounts with banks that offer higher rates. Under this section, interest income of up to ₹10,000 is exempt from tax. You can watch out for issue of any tax-free bonds in the coming year to supplement her income.

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