2020: Where Should a Senior Citizen Invest

When we speak of investments and investment strategies, the popular rule immediately gets plastered in front of our eyes – if you fall in the age group of 30-40 years, a major chunk of your corpus, say about 70% needs to be invested in equity and in case you are 60 years and above, only 40% of the corpus should be invested in equity. In short, as a person ages, the risk appetite will reduce as all the life goals have been achieved and one need not opt for the additional risk. For any senior citizen what is crucial is having a regular income and ensuring the security of the income. So, what are the investment options available for senior citizens this year? Should they invest in hybrids or stick on to debt instruments or are there any mutual funds in which they can make an investment? There are numerous investment options curated for senior citizens like the Senior Citizens’ Savings Scheme (SCSS), the National Pension System (NPS), mutual funds, Life Insurance Premiums, FDs, etc. A few of these options are low-risk and there are a few high-risk options such as mutual funds which also give a high return. The perfect portfolio for any senior citizen must have a balance between income as well as growth, depending upon his/her requirements.

Who requires a regular income?

There might be senior citizens who receive a pension from employers, and they might not require a regular income. Hence, their portfolios would include mutual funds that focus on growth. This is also the position of those who receive the Employees’ Pension Scheme pension, although this pension might need other income as well. Finally, the ones who are self-employed or have worked in unorganized sectors might not get any pension. They are the ones who would be in need of a regular income from the investments. Let us now look into some of the options available for senior citizens this year.

I. Monthly Income Investments

These are investments that ensure the individual has a regular monthly income and this can easily handle the daily expenses of a senior citizen. These are:

1. Bank Fixed Deposits & Recurring Deposits

In contrast to ordinary citizens, senior citizens can get a higher rate of interest on bank fixed deposits as well as recurring deposits, usually about 0.5% higher than the normal rate. Senior citizens can opt for either regular interest payouts which are a non-cumulative option or the cumulative option where it is received along with their principal at maturity. The minimum amount to be invested in FDs differs between banks, but there isn’t any limit on your maximum investment amount. As per the latest Section 80TTB of the IT Act, any receipt of interest up to Rs 50,000 on bank deposits, or deposits with post offices/co-operative banks are exempt from tax. Also, there will be no deduction of TDS from interest payments in a single financial year.

2. Post Office Fixed Deposits & Recurring Deposits

Post Office FDs & RDs are quite similar to that of FDs & RDs of banks, though they come with additional security. The money from these FDs and RDs will go to the government which ensures no scope of default. These deposits in post office schemes are not subject to TDS deduction, unlike that of bank FDs and RDs. There is a scheme offered by the Post Office known as the Post Office Monthly Income Scheme that gives a monthly income. Note that investment in the 5-year FDs of Post office is exempt from only up to Rs 1.5 lakh, but the interest is taxable.

3. Senior Citizens Savings Scheme (SCSS)

The Senior Citizens Savings Scheme is a savings scheme that is backed by the government and can be availed by any senior citizen from a bank or post office. It offers more security in contrast to bank FDs as the SCSS money will be held by the government. This scheme has a 5-year tenure that could be extended by an additional 3 years. The interest rate offered by SCSS for April-June 2020 is 7.4%. This interest rate gets reviewed by the Ministry of Finance every quarter and is subject to change periodically. The interest on an SCSS deposit is calculated as well as credited quarterly. Any Investment in the SCSS is tax-deductible up to just Rs 1.5 lakh every year, however, the interest on it is taxable.

4. Post Office Monthly Income Scheme (POMIS)

The Post Office Monthly Income Scheme is a savings scheme backed by the government. It allows investors to save a fixed amount each month. Subsequently, the interest gets added at the rate applicable, to the investment and the payout is done every month to the depositor. This scheme is good for people who want an investment option that generates a fixed monthly income, but they do not wish to opt for market risks. This makes the scheme favorable for senior citizens/retired individuals. There isn’t any limit on the number of accounts held by an individual, however, there is a restriction on the maximum investment amount which can be cumulatively contributed across all the POMIS accounts. For an account that is operated by one person, the maximum investment permitted in POMIS is only Rs. 4.5 lakhs. If the account is held jointly by 2 or a maximum of 3 joint holders, the maximum amount that can be invested is Rs.9 lakhs. Any investment in POMIS doesn’t attract tax rebate under the Income Tax Act, however, the interest income will be taxable.

II. Growth Investments

There are certain investment options that pitch in the growth aspect in the portfolio of a senior citizen. This helps them to match the rising inflation and allows them to leave behind an inheritance for their family.

1. National Pension System

Senior citizens can opt for the NPS as the eligible age for NPS is 18 to 65. Once this account is created, the same can be extended to 70 years of age. This investment is also tax-deductible up to Rs 1.5 lakh u/s 80C and also up to an extra Rs 50,000 u/s 80CCD(1B). There isn’t any fixed rate of interest on NPS, however, money invested in NPS is invested as per the choice of the investor into equity as well as debt funds, and by way equity investment, the initial investment can grow. On the date of maturity of this investment, 60% of the corpus is tax-free and 40% of the corpus has to be used towards monthly pension.

2. Insurance Premiums

There are some life insurance policies that provide life cover as well as act as an investment option. These are Endowment plans and Unit Linked Insurance Plans (ULIPs). However, it is advised to tread with caution and opt for policies having the lowest insurance charges which include policy administration charges, premium allocation charges, mortality charges, fund management charges, etc.

3. Mutual Funds

Mutual Funds are a great way of including an element of wealth creation in a senior citizen’s investment portfolio. Senior citizens can opt for general mutual funds to achieve high returns. Amongst the equity funds, the large-cap funds are quite low-risk whereas the mid and small-cap funds are more of high-risk high-return funds. You can invest in mutual funds via MoneyFront and save on distributor expenses and other similar costs. If you hold your equity funds for 1 year or more, any gains over and above Rs.1 lac are taxed at 10%, and in case they are held for less than a year, they get taxed at 15%. ELSS funds are included u/s 80C for a tax deduction. Senior citizens can also opt for overnight as well as liquid funds for the funds needed. Alternatively, an investment in short-term debt funds that have AAA-rated papers is recommended.

4. Pradhan Mantri Vaya Vandana Yojana (PMVVY)

The Life insurance corporation of India has offered a pension scheme that offers a guaranteed pension payout for 10 years at a specific rate. This scheme comes with a death benefit wherein the nominee is benefited when the purchase price is returned. You can invest in this scheme till March 31, 2023. As of now, the rate of interest is 7.4% per annum and the tenure is 10 years. A senior citizen can invest a maximum amount of Rs 15 lakhs in this scheme.  The minimum pension income offered by this scheme is Rs.1000/month or Rs.12,000/year. It offers a maximum pension of Rs.9,250/month or Rs.1,11,000/year. Another good investment for senior citizens was the RBI bonds that offered a sovereign guarantee, two payout options, and a 7.75% interest rate. However, the issue has been closed on May 28, 2020. We hope this post helps you select the best investment option and enjoy the benefits of a good investment decision.