7 options to build risk-free income stream after retirement

One of the most common questions by readers of RupeeIQ is ‘how to generate risk-free income after retirement’. We list out seven options where you can earn regular scheme without worrying about risk to capital

Kumar Shankar Roy Oct 3, 2019

Retirement Investment OptionsRetirement means no salary for most people. The moment you hit 60 years of age, it is usually curtains on your working life. The good thing about retirement is that forced savings done through your professional life lead to a reasonable corpus. This retirement corpus, from a few lakhs to crores, can be used to generate a regular income. Yes, you can arrange your own ‘salary’ in the post-retirement phase. One of the most common questions by readers of RupeeIQ is ‘how to generate risk-free income after retirement’. Most readers ask the question about their parents or older relatives who have just retired.

Before we tell you more, it must be admitted that senior citizens (those who have attained 60 years of age or more) do not have the risk-taking capacity. Some senior citizens may invest in stocks, mutual funds etc., but a large portion of them cannot afford to risk their capital/principal. This is why there is a substantial focus on ‘risk-free’ income stream. What is ‘risk-free’? When senior citizens say they want risk-free income, they usually mean no capital erosion i.e. their principal should remain intact. Plus, they want a good guarantee on the returns for the longest time possible. That being said, here are seven risk-free income stream options. Readers are requested to use more than one option, instead of focussing on just one avenue. Read on to know more.

1. Senior Citizen Saving Scheme

Senior Citizen Saving Scheme (SCSS) usually gives the highest return i.e. 8.6% (at present; liable to change if the government wants). You can open an SCSS account in an authorised bank or post office. It is also transferable across India.

The maximum investment limit is Rs 15 lakh for one senior citizen. Interest is paid at 8.60% p.a. from the date of deposit payable at the end of each calendar quarter i.e. 31st March / 30th June / 30th September / 31st December.

Compounding of interest not permissible. The tenure of investment is five years but can be extended once by an additional three years. By keeping Rs 15 lakh in SCSS, you can get the quarterly interest of Rs 32,250 i.e. annual income of Rs 1.29 lakh.

Tax deduction of up to Rs 1.5 lakh can be claimed under Section 80C of the Indian Tax Act, 1961.

To open a SCSS account, you have to be either an individual who has attained the age of 60 years and above on the date of opening of an account; who has attained the age of 55 years or more but less than 60 years and who has retired on superannuation or otherwise on the date of opening an account; or who has retired at any time before the commencement of these rules and attained the age of 55 years or more on the date of opening of an account; the retired personnel of defence services (excluding civilian defence employees) irrespective of the above age limits subject to fulfilment of other specified conditions.

Unfortunately, NRIs are not eligible to open an account under these rules.

Withdrawal is permitted after one year of opening the account but a penalty is levied.

The depositor may nominate a person or more than one person, at the time of opening of the account or at any time after the opening of the account but before its closure. Nomination made by the depositor can be cancelled or varied.

In case of the death of the depositor before maturity, the account is closed and deposit refunded on the application along with interest to the nominee or legal heirs.

2. Post Office Monthly Income Scheme Account

Keeping money in the Post Office is one of the ways to generate post-retirement income. You have to invest in the Post Office Monthly Income Scheme Account (MIS/POMIS).

The maximum investment limit is Rs 4.5 lakh in a single account and Rs 9 lakh in a joint account.

The interest payable is 7.6% per annum and payable monthly.

A PO MIS account can be opened by cash/cheque. Nomination facility is available at the time of opening and also after opening of the account.

A Post Office Monthly Income Scheme Account can be transferred from one post office to another. We must warn you that transferring may involve hassle.

The investment tenure of PO MIS is five years. As per Post Office, interest can be drawn through auto credit into savings account standing at same post office, through PDCs or ECS. In the case of MIS accounts standing at CBS Post offices, monthly interest can be credited into savings account standing at any CBS Post offices.

PO MIS can be prematurely en-cashed after one year but before three years at the discount of 2% of the deposit and after three years at the discount of 1% of the deposit. Discount means a deduction from the deposit.

3. Pradhan Mantri Vaya Vandana Yojana

Government of India launched Pradhan Mantri Vaya Vandana Yojana (PMVVY) a few years ago. LIC has been given the sole privilege to operate this scheme.

You can invest a maximum of Rs 15 lakh. Tenure of investment is 10 years. On survival of the pensioner during the policy term of 10 years, pension in arrears (at the end of each period as per mode chosen) is payable. In the case of the unfortunate death of the pensioner during the policy term of 10 years, the purchase price (initial investment) is refunded to the chosen beneficiary. On survival of the pensioner to the end of the policy term of 10 years, purchase price along with final pension installment is payable, as per LIC.

The minimum entry age for PMVVY is 60 years (completed). There is no maximum entry age, which means you can invest in a block of 10 years.

The minimum and maximum purchase price under different modes of pension varies. For monthly pension, the minimum investment is Rs 1,50,000 and the maximum is Rs 15,00,000. For quarterly pension, the minimum investment is Rs 1,49,068 and the maximum is Rs 14,90,683. For half-yearly pension, the minimum investment is Rs 1,47,601 and the maximum is Rs 14,76,015. For yearly pension, the minimum is Rs 1,44,578 and the maximum is Rs 14,45,783.

The minimum pension is Rs 1,000 per month, Rs 3,000 per quarter, Rs 6,000 per half-year or Rs 12,000 per year. The maximum pension is Rs 10,000 per month, Rs 30,000 per quarter, Rs 60,000 per half-year or Rs 1,20,000 per year.

The pension under PMVVY is paid through NEFT or Aadhaar enabled payment system. The first installment of pension is paid after 1 year, 6 months, 3 months or 1 month from the date of purchase of the same depending on the mode of pension payment i.e. yearly, half-yearly, quarterly or monthly respectively.

The scheme allows premature exit during the policy term under exceptional circumstances like the pensioner requiring money for the treatment of any critical/terminal illness of self or spouse. The surrender value payable in such cases is 98% of the purchase price. Also, there is a loan facility i.e. after completion of three policy years. The maximum loan that can be granted is 75% of the purchase price. The rate of interest to be charged for the loan amount is determined at periodic intervals. Loan interest is recovered from the pension amount payable under the policy.

Once you exhaust your retirement corpus i.e. Rs 15 lakh in SCSS, Rs 15 lakh in PMVVY and Rs 4.5 lakh in POMIS, it is time to consider the following options. The avenues mentioned below have no limit for investment.

Investment name Maximum investment Return Tenure Tax benefits
Senior Citizen Saving Scheme Rs 15 lakh Interest at 8.60% p.a. from the date of deposit payable at the end of each calendar quarter 5 years but can be extended once by an additional 3 years Tax deduction of up to Rs 1.5 lakh can be claimed under Section 80C of the Indian Tax Act, 1961.
Pradhan Mantri Vaya Vandana Yojana Rs 15 lakh 8% p.a. payable monthly (equivalent to 8.3% per annum) 10 years N.A.
Bank Fixed Deposit No limit 5% to 9.10% # Various tenures N.A.
Post Office Monthly Income Scheme Account Rs 4.5 lakh 7.6​ % p.a. payable monthly 5 years N.A.
Government Securities No limit * 7% to 8% # payable half-yearly Up to 40 years No TDS deductionns
GoI Savings Bonds No limit 7.75% p.a payable half-yearly 7 years The bonds will be exempt from Wealth-Tax under the Wealth-Tax Act, 1957
Immediate annuity from a life insurance company No limit 4.5% to 7.2% p.a. for 60 year old Fixed tenure or till death Tax deduction on premium paid under Sec 80CCC; commutation under Sec 10(10A) of the Income Tax Act, 1961.
* Some online platforms will allow you invest maximum Rs 2 crore one-time       #Actual interest rates may vary from rates mentioned here

4. Bank Fixed Deposit

Many senior citizens also use the bank FD route. Senior citizens usually get 0.50% more than the general public for bank FD.

Bank FDs can be taken from both public sector banks and private sector banks. Many small finance banks, new small lenders, also offer attractive rates.

The bank FD interest rates are fixed for the tenure. The maximum bank FD is 10 years. Depending on the tenure, senior citizens can get 5% to 9.1% per annum interest.

Bank FDs give you the option to receive interest monthly, quarterly, half-yearly and yearly.

There is no upper limit to invest in a bank FD, but any amount beyond Rs 2 crore to Rs 5 crore at a branch is usually taken after taking head office approvals.

In case of premature withdrawal of the deposit, interest on a bank FD is not paid at the originally contracted rate. In such cases, interest will be paid at the applicable rate of interest for the duration in which the deposit is maintained with minus premature withdrawal penal rate. The penalty can be 0.5%.

If you invest in a bank FD, do remember TDS is to be deducted when the interest income earned exceeds Rs 40,000 in a financial year for all resident assesses, except for resident senior citizens. In the case of resident senior citizens, TDS is to be deducted when the interest income earned exceeds Rs 50,000 in a financial year. To avoid TDS, you may submit Form 15H declaration.

Do note that your bank deposits are insured up to Rs 1 lakh. This means if you have Rs 50 lakh in FDs in a bank, deposit insurance covers amounts up to Rs 1 lakh in that bank if the bank fails in the future. While large banks have not failed in recent history, the capital protection element is Rs 1 lakh in the worst case.

5. Government Securities (G-Sec)

Most of the post-retirement options mentioned so far protect your principal. However, the interest rate risk still looms large. Most of the interest rates are controlled by the government. The overall rate of interest in the country decides bank FDs.

There is one product for senior citizen which guarantees interest rates for the longest period of time. Welcome to the world of Government Securities or G-Secs. In case of a bank FD, you lend your money to the bank. In the case of G-Secs, you lend your money directly to the Government. Thus, G-Secs provide the highest form of protection because the government is your borrower.

Earlier, no retail investor, leave alone senior citizens, could buy G-Secs. NSE in collaboration with RBI has recently made it possible for you to start investing in G-Secs. This means that with as low as Rs 10,000 (there is no maximum limit on how much you buy) one can get G-Secs that will guarantee an interest rate for as long as 40 years. Except for life insurance annuity product, no other post-retirement provides such clarity of income over such a long period.

You can buy G-Secs online through NSE bidGo app. Some brokers also allow you to buy G-Secs. You get a guaranteed return on both interest and principal. Unlike FD, there is no TDS in G-Secs. You can lock in attractive interest rates for a longer period. In the worst case, a senior citizen can even use G-Secs as collateral to avail loan. Plus, you have the option to sell G-Secs in the secondary market.

Interest income from G-Secs is credited to your bank account, twice a year. From a taxation point of view, G-Sec interest is considered as income from other sources, which is why taxes have to be paid as per the income tax slab. If there is any appreciation in the G-Sec price, it is considered capital gains. Long-term capital gain (LTCG) is 10% flat or 20% with indexation. Short-term capital gain (STCG) is as per the applicable slab rate. In the case of G-Secs, gain is considered LTCG if held for more than three years, otherwise it is short term capital gain STCG.

6. GoI Savings Bonds

Another way to get risk-free income is GoI (Government of India) Savings Bonds. These are sold by most large banks. Yoiu can ask them about the 7.75% savings (taxable) bonds. These are convenient investments with low-risk returns. Investment in the these bonds, often referred to as RBI bonds, are completely guaranteed.

You can opt for either cumulative option (interest paid at the end of tenure), or non-cumulative option. They pay 7.75% p.a. interest. In the non-cumulative (half-yearly) option, interest to the bondholders will be paid from the date of issue up to 31st July/31st January as the case may be and thereafter half yearly for the period ending 31st July and 31st January on 1st August and 1st February. In the cumulative option, interest at the rate of 7.75% per annum compounded with half yearly and will be paid to the investor on maturity along with principal (the maturity value of the bonds shall be Rs 1,703 for every Rs 1,000).

The minimum investment amount is Rs 1,000. There is no upper limit on investment for these bonds. The interest on these bonds is taxable, like most interest income. They usually come with seven years tenure. Do note that these bonds are not transferable. These bonds are usually not allowed to be used as collateral. They are also not tradable.

The bonds will be exempt from wealth-tax under the Wealth-Tax Act, 1957, according to information provided by ICICI Bank.

These bonds are available for individual investment on sole holder or surviving holder basis. Customers can provide a nomination.

Although the bonds have a tenure of seven years, they can be redeemed before maturity based on the age of the investor at the time of exiting. For those in the age bracket of 60 to 70 years, the lock-in period is six years from the date of issue. For those between 70 years and 80 years, it is five years. For anyone above 80 years, it is four years. Do note that 50% of interest due and payable for the last six months period of the holding period shall be recovered as penalty from the investor for premature encashment both in respect of cumulative and non- cumulative bonds.

These bonds can be applied in physical or dematerialized mode.

7. Immediate annuity from a life insurance company

An immediate annuity gives the financial security to live life on your own terms post-retirement. It assures a regular stream of income throughout your life with options to match your needs.

An immediate annuity is not guaranteed by the government. The guarantee comes from the life insurance company.

In case of immediate annuity, you pay once (purchase price) and get guaranteed regular income for life (annuity). You have the flexibility to receive income monthly, quarterly, half-yearly or yearly. There are options to get return of purchase price on death, critical illness or permanent disability due to accident.

Typically, a 60-year old purchasing Rs 10 lakh plan will get between Rs 22,960 (4.59% p.a. return) to Rs 36,276 (7.2% p.a. return). Higher annuity rates are there for large purchase price and deferred pension plans.

Some life insurance companies have a minimum annuity per annum of Rs 12,000 (Rs 1,000 per month), but there are no maximum limits.

Immediate annuity product comes in over a dozen options to choose from. So, choose one that suits your financial needs. Immediate annuity plans can be bought for a discount on the purchase price for the National Pension Scheme (NPS) subscribers.

Immediate annuity investments can fetch you a tax deduction on premium paid under Sec 80CCC. The commutation gets tax benefit under Sec 10(10A) of the Income Tax Act, 1961. Let us explain the latter tax benefit. Under an immediate annuity plan, the interest is taxed as ordinary income but the principal is exempt from taxes as it is a return of your investment. However, when you have received the principal amount in full, the payments will be fully taxable.

Disclaimer: Views expressed here in this article are for general information and reading purpose only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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