We explain various investment products, the income that you can earn on and the taxation treatment of these products. Read on.

Company fixed deposits

Just as you have ‘Fixed Deposits’ or FDs with banks, you can also deposit money with companies. These types of deposits are known as company fixed deposits or ‘corporate deposits’. Only companies who meet the criteria laid down under the Companies Act and the rules framed by the Central Government under it can accept company fixed deposits.

Company Fixed Deposits tend to offer higher rates than bank fixed deposits. However, they are also relatively less liquid than Bank FDs and some companies lay down highly restrictive conditions for withdrawing before maturity. Typically such deposits do not allow you to withdraw within six months of making the deposit.

The interest you earn on company fixed deposits is fully taxable.

Non-convertible debentures (NCDs)

NCDs are essentially a vehicle of lending money to companies. They are called ‘non-convertible’ because they cannot be converted to equity (stocks). They can be secured (backed by specific assets) or as is more common, unsecured (only secured by the company’s overall repayment ability).

NCDs tend to offer higher interest rates than bank and company fixed deposits. This is more so with unsecured NCDs. They are often rated by credit rating agencies such as CRISIL, CARE and ICRA and a high rating (eg: AAA) is a good indicator of creditworthiness. The interest you receive on NCDs is fully taxable. Some NCDs are traded on the stock exchange and you can exit them by selling them on the exchange.

Small savings schemes

Senior Citizens Savings Scheme

Senior Citizens’ Savings Scheme (SCSS) or the SCSS is a savings instrument available to resident Indians above the age of 60. It has a duration of five years which can be extended by another three years.

Interest Rate and Tax

Contributions to the SCSS are available as deductions from income tax under Section 80C up to a limit of Rs 1.5 lakh. The interest rate on the SCSS is linked to the interest rates on government bonds and is reset every quarter (for new subscribers). Interest on it is paid out quarterly. 

Investment Limit

You can invest a minimum of Rs 1,000 and maximum of Rs 15 lakh in the SCSS. The interest on the SCSS is fully taxable and TDS is deducted on it if the interest payable is more than Rs 10,000.

How to invest

You can open an SCSS account with a bank or a post office. Breaking SCSS prematurely carries a penalty of 1.5% to 1% depending on how long it has been held.   

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

The PMVVY although marketed as a pension is essentially a fixed deposit with the Life Insurance Corporation of India (LIC). It is open to people above the age of 60 and guarantees an interest rate of 8% for a period of 10 years.  The minimum amount you can invest in the PMVVY (monthly option) is Rs 1.5 lakh and the maximum amount that you can invest is Rs 7.5 lakh.

Contributions to the PMVVY do not carry any tax deduction. The interest on it is also fully taxable. Interest on the PMVVY can be taken monthly, quarterly or annually. On maturity, your principal is returned to you.

In case of your death in this time period, the investment amount is paid to your heirs. Partial exit from it is also allowed in case of critical illness and 98% of your deposit is paid back. 

Kisan Vikas Patra (KVP)

The KVP is a savings instrument open to everyone (whether or not they are farmers). It has a tenure of 115 months (9.7 years) and can be purchased at banks and post offices. However, its lock-in period is only 2.5 years and you can withdraw your money after the same. Its interest rate is linked to the interest rate on government bonds and is reset every quarter. 

Tax

It is not eligible for any tax benefits and the interest on it is also fully taxable. However, it is exempt from TDS at the time of maturity.

National Savings Certificate (NSC)

The NSC is a savings instrument eligible for tax deduction up to Rs 1.5 lakh under Section 80C. The interest on it is linked to the interest rate on government bonds and is reset every quarter. The interest on the NSC is compounded rather than being paid out to you (meaning that it is added back to the principal).

Tax

NSC is also eligible for deduction under Section 80 C up to Rs 1.5 lakh. No TDS is deducted from NSC on maturity. NSC has a lock-in of five years. It is available for purchase at post offices throughout India.

Sukanya Samriddhi Yojana

This is an investment scheme designed for the benefit of the girl child. It can be opened by the parent or legal guardian of a girl at any time after her birth until she reaches the age of 10. The account matures 21 years after opening or when the girl gets married after crossing the age of 18. It requires a minimum annual deposit of Rs 1,000 and can take a maximum deposit of Rs 1.5 lakh per annum. The account is operated by the parent or legal guardian of the girl child till she reaches the age of 10. Thereafter she can operate it herself. The parent and child must be resident Indians.

You have to keep contributing to the account for 15 years after opening it. The interest on it is compounded and added back to the principal. The account continues to earn interest after 15 years until it matures. The interest rate on the SSY is linked to the rate on government bonds and is reset every quarter.

Tax

Contributions to the SSY are available as tax deductions under Section 80C up to Rs 1.5 lakh. The interest earned on it and the total value paid out at maturity are also exempt from tax.

Interest rates on major small savings schemes

Instrument Interest Rate % (Jan-March 2017) Interest Rate % (Jan-March 2018)
Post Office Deposits
Savings deposit 4 4
1 year time deposit 7 6.6
2 year time deposit 7.1 6.7
3 year time deposit 7.3 6.9
5 year time deposit 7.8 7.4
5 year recurring deposit 7.3 6.9
5 year Senior Citizens’ Savings Scheme 8.5 8.5
5 year Post Office Monthly Income Scheme 7.7 7.3
5 year National Savings Certificate 8 7.6
Public Provident Fund 8 7.6
Kisan Vikas Patra 7.7 7.3
Sukanya Samriddhi Scheme 8.5 8.1

Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds are issued by the Government of India and are a method of buying gold without physically doing so. They represent a certain quantity of gold, and on maturity, you will receive a payment equal to the notional quantity of gold you have bought. Each resident individual is allowed to buy anywhere between 1 gm and 4kg gold through sovereign gold bonds per annum.  

Maturity

They have a tenure of eight years. However, you can also exit them five years after purchase on the dates of coupon payment. In addition, you can sell them on an exchange.

Interest Rate and Taxation

Unlike physical gold, sovereign gold bonds also carry interest (currently 2.5%). The value of Sovereign Gold Bonds on maturity is not taxable. If you sell them before maturity on an exchange, you will get the benefit of long-term capital gains taxation (and hence indexation) However the interest you get on them is taxable. TDS is not deducted on payments made through them.

How to buy

You can buy them online or offline from banks and post offices. They are open for subscription from Monday to Wednesday every week (until December 2017). Their price will be the weighted average of the price of gold in the preceding three days. Alternatively, you can buy them (and sell them) on the stock exchange.

You will receive a holding certificate (including by email if you provide your email address). You can also hold them in demat form in your demat account if you have one.

PMS (Portfolio Management Scheme)

A portfolio management scheme is a vehicle through which you invest in stocks, using the services of a portfolio manager. In a ‘discretionary’ PMS, the manager sets up and looks after your stocks without needing your approval for every transaction. In a ‘non-discretionary’ PMS, your approval is needed for transactions. Typically, a PMS is only open to those who can invest at least Rs 25 lakh in it. You can also invest this amount ‘in kind.’ In other words, you can move your existing stocks into the PMS.

A PMS is regulated by the Securities and Exchange Board of India (SEBI) but not in the way the mutual funds are. There is no NAV or Net Asset Value declared at the end of the day. PMS managers also typically have greater freedom to earn a higher return than mutual funds. On the flip side, they can also subject you to higher risks.

Expenses

The expenses charged for the management of your stocks are also decided mutually by you and the PMS manager. This is different from mutual funds whose fees are regulated closely by SEBI.

Tax

In a PMS, you have to pay tax on the gains made by the PMS manager even if you have not withdrawn money from it. This is different from mutual funds where gains made by the fund do not create any tax liability on you, till you take your money out of the fund.  

Gold Monetisation Scheme

The Gold Monetisation Scheme, introduced in 2015, is a government scheme that allows resident Indians to convert physical gold into paper gold and earn some interest on it. In this scheme, you deposit your gold with a bank and you earn interest on it. Deposits can be placed into one of the three buckets – short-term (1-3 years), medium term (5-7 years) and long-term (12-15 years). The scheme only accepts gold deposits of 30 grams or more.

Short Term Bank Deposit

This deposit ranges from 1-3 years and is offered at the discretion of the bank (not all banks offer it). The bank pays you interest which you can either take in the form of money or gold itself. eg: 1 gm for every 100 gms of gold deposited. This interest rate will fluctuate from one bank to another.

Medium-term gold deposit

This deposit ranges from 5-7 years. You can make it at a bank but the deposit is taken on behalf of the Central Government. The interest rate is also fixed by the Central Government (currently 2.25%) and is paid out in rupees rather than gold. It has a lock-in of three years after which you can withdraw by paying an interest rate penalty.

Long-term gold deposit

This deposit ranges from 12-15 years. You can make it at a bank but the deposit is taken on behalf of the Central Government. The interest rate is also fixed by the Central Government (currently 2.5%) and is paid out in rupees instead of gold. There is a lock-in of five years after which you can withdraw by paying an interest rate penalty.

How it’s done

The depositor first picks the bank he wants to open the deposit with. If he does not already hold a bank account with any bank and his KYC (know-your-customer) is not done, this will have to be done first. The customer must then take his gold to a ‘collection and purity testing centre’ which has been approved by his bank from amongst a list of such centres approved by the Central Government. The centre will test and issue a receipt saying how much gold of 995 purity is contained in the deposit. The depositor takes this information to the bank and gets a certificate from the bank for the gold deposit.

Redemption

The depositor can get back his deposit on redemption in either Indian rupees or gold.

AIF (Alternative Investment Fund)

An Alternative Investment Fund or AIF is an unconventional type of fund such as one which invests in unlisted companies (private equity) or does short-term trades in the equity market (hedge fund). SEBI has established categories and laid down norms for Alternative Investment Funds (AIFs) in the SEBI Alternative Investment Funds Regulations, 2012. These create three categories of alternative funds.

The minimum investment in AIFs has been set at Rs 1 crore (however up to two members of a family as defined by the AIF regulations can invest jointly eg: Rs 50 lakh each). An AIF cannot have more than 1,000 investors. However, each scheme must have a corpus of at least Rs 20 crore.

The AIF categories are:

1) Category I: Funds investing in the social sector or small and medium enterprises or some other activity, specifically encouraged by the government. They are close ended funds and must have a minimum tenure of three years. They cannot invest more than 25% of their corpus in a single company.

2) Category II: Funds investing in any other activity without leverage (borrowing). Eg: Private Equity Fund. They are close ended funds and must have a minimum tenure of three years and cannot invest more than 25% of their corpus in a single company.

3) Category III: Funds trading in the markets in the short term with leverage. Eg: Hedge Fund. However, SEBI limits this to twice the NAV of the fund. 

Taxation

Category I and II AIFs have pass-through status. This means that you have to pay tax on the AIF income or gains rather than the fund. The fund must, however, withhold tax at 10% for resident investors and at the applicable rate for NRIs

For Category III AIFs, income tax is paid by the fund.

Reverse mortgage

A reverse mortgage is a method for senior citizens to derive income in retirement based on the value of the house they own. Under this scheme, a bank issues a loan to the senior citizen based on the market value of the house, his income and a few other factors. However, the loan is not disbursed at once. Instead, the loan is paid as a regular periodic payment (akin to FD interest or a salary). The payments made under a reverse mortgage scheme are tax-free.

Eligibility

Only individuals who are 60 years and above are eligible for this loan and the maximum tenure is 20 years. The loan cannot be recovered while the senior citizen is alive and residing in the home.

Repayment

Instead, the loan it is recovered after the death of the senior citizen and his or her spouse. The heirs of the senior citizen must repay the loan before inheriting the house. If they do not wish to do so, the house is sold to recover the loan. Any amount left over after paying off the loan is paid to the heirs.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.