Savings: Exploring Investment Options Beyond Fixed Deposits

Fixed deposits are a popular way to save money in India. They are low-risk investments that offer tax benefits and a fixed rate of interest on your deposit. However, there are several alternative investment options that you can consider if you want to invest your money without tying it up for long periods of time or with more flexibility. This article will explore the pros and cons of fixed deposits and suggest some alternative investment options.

Post Office National Savings Monthly Income Account (POMIS)

The Post Office Monthly Income Scheme (POMIS) is a secure and popular investment option in India, backed by the Government of India. It offers a guaranteed monthly income to investors, making it ideal for individuals seeking regular income. The interest rate for POMIS in 2024 is 7.4% per annum, payable monthly. Here is a detailed overview of POMIS:

Features and Benefits:

• Capital protection: As a government-backed scheme, your money is safe until maturity.
• Tenure: POMIS has a lock-in period of 5 years. You can withdraw the invested amount when the scheme matures or reinvest it.
• Low-risk investment: As a fixed-income scheme, your investment is not subject to market risks.
• Affordable deposit amount: You can start with a nominal initial investment of Rs.1,000 and invest in multiples of this amount, with a maximum limit of Rs. 9 lakhs for individual accounts and Rs.15 lakhs for joint accounts.
• Guaranteed returns: You earn a fixed income in the form of interest every month, which is higher compared to other fixed-income investments like FDs.
• Tax-efficiency: Your investment is not covered under Section 80C, and TDS is not applicable.
• Payout: You will receive the first payout one month after making the first investment, not at the beginning of the month.
• Multiple Account Ownership: You can open more than one account in your name, but the total deposit amount cannot exceed Rs. 9 lakhs across all accounts.
• Joint account: You can open a joint account with 2 or 3 people, with an aggregate investment limit of Rs.15 lakhs.
• Fund movement: You can move funds to a recurring deposit (RD) account, a recent feature added by the Post Office to earn higher returns.
• Nominee: You can nominate a beneficiary (a family member) to claim benefits and the corpus in case of your demise during the account's term.
• Ease of money/interest transaction: You may collect the monthly interest directly from the post office or get it transferred to your savings account. Reinvesting the interest in a SIP is also an option.
• Reinvestment: You may reinvest the corpus post-maturity in the same scheme for another block of 5 years to continue earning benefits.

Eligibility Criteria:

Only resident Indians can open a POMIS account, and NRIs are not eligible for this scheme. Any adult can open an account, and you can also open an account on behalf of a minor aged 10 years and above. They can access the funds when they turn 18. A minor, after attaining majority, must apply for the conversion of the account to their name.

Maximum Deposit Amount:

The maximum deposit limit for POMIS is Rs. 9 lakhs for a single account and Rs.15 lakhs for a joint account.

How to Open a POMIS Account:

Opening a POMIS account is straightforward. Here are the steps:

• Open a post office savings account if you don't already have one.
• Collect a POMIS application form from your Post Office.
• Submit the duly filled form along with a photocopy of your ID, residential proofs, and 2 passport-size photos. Carry the originals for verification.
• Get the signatures of your witness or nominee(s) on the form.
• Make the initial deposit via cash or cheque. For a post-dated cheque, the date on the cheque will be the account opening date.
• Once the processing is done, the Post Office executive will provide the details of your newly opened account.

Consequences of Early Withdrawal:

Early withdrawal before the completion of the 5-year tenure incurs penalties. Here are the penalty regulations:

• Before completing one year: No benefits.
• Between 1st and 3rd year: The entire deposit is refunded after deducting a 2% penalty.
• Between 3rd and 5th year: The entire corpus is refunded with a 1% penalty.

RBI Floating Rate Savings Bonds

The Government of India launched the Floating Rate Savings Bonds, 2020 (Taxable) scheme on July 1, 2020. These bonds are issued by the RBI on behalf of the Government of India and are open to investment by individuals, including joint holdings, and Hindu Undivided Families (HUFs). The minimum investment amount is ₹1,000, with no maximum limit. The bonds are issued in electronic form and held in a Bond Ledger Account (BLA).

The Floating Rate Savings Bonds offer a fixed tenure of seven years and provide guaranteed, risk-free returns. The interest rate on these bonds is linked to the National Savings Certificate (NSC) rate plus an additional 0.35%reviewed and reset every six months in January and July. The interest is payable semi-annually on January 1 and July 1, and there is no option to pay interest on a cumulative basis. The current interest rate for the period ending June 30, 2024, is 8.05%.

It is important to note that the interest income from the bonds is taxable under the Income Tax Act, 1961. Tax will be deducted at source while making interest payments. Additionally, these bonds are not transferable, except in the case of the death of the bondholder, where it can be transferred to a nominee or legal heir. The bonds are also not tradable in the secondary market and cannot be used as collateral for availing loans from banks, financial institutions, or non-banking financial companies.

Premature redemption of the bonds is allowed for specified categories of senior citizens. The minimum lock-in period for premature withdrawal varies based on the age of the investor, with investors aged 60 to 70 years having a 6-year lock-in period, those aged 70 to 80 years having a 5-year lock-in period, and investors aged 80 years and above having a 4-year lock-in period. A penalty charge of 50% of the last coupon payment will be applicable for premature withdrawals.

National Savings Certificates (NSCs)

NSCs offer a fixed-income investment with a guaranteed, regular return. The interest rate is currently 7.7% and is revised every quarter. The scheme has a fixed maturity period of five years, with no maximum limit on the purchase of NSCs. The minimum investment is Rs. 1,000, with no maximum limit.

NSCs are a safe investment option, providing complete capital protection. The scheme is open to any Indian citizen over the age of 10, however, it is not available to Hindu Undivided Families (HUFs), Trusts, Non-Resident Indians (NRIs) or companies.

The key features of NSCs include:

• Interest rates: The certificates earn an annual fixed interest, which is paid at maturity.
• Tax benefits: The principal invested qualifies for tax savings under Section 80C of the Income Tax Act, up to Rs. 1.5 lakhs annually.
• Investment flexibility: There is no maximum limit on investment and investors can start with a minimum of Rs. 100.
• Accessibility: NSCs can be purchased from any post office by submitting the required KYC documents.
• Loan collateral: NSCs are accepted as collateral for secured loans from banks and NBFCs.
• Power of compounding: Interest is compounded annually and reinvested by default.
• Nomination: The investor can nominate a family member to inherit the NSC in the event of their death.
• Corpus on maturity: The investor will receive the entire corpus value on maturity, with no TDS on NSC payouts.
• Premature withdrawal: NSCs have a lock-in period of five years and generally cannot be withdrawn early, except in the case of the death of the investor, a court order, or forfeiture by a pledgee.

In summary, NSCs are a secure and accessible investment option, offering guaranteed returns and tax benefits. They are a good choice for those seeking a safe investment with a fixed maturity period and the option to invest a small amount with no upper limit.

Senior Citizen Savings Scheme (SCSS)

The Senior Citizen Savings Scheme (SCSS) is a government-backed retirement benefits programme for senior citizens in India. Introduced in 2004, the scheme provides a regular income stream with high interest rates, safety, and tax-saving benefits. Here is a detailed overview of the SCSS:

Eligibility

The SCSS is available to individuals who are 60 years or older. Additionally, retired civilian employees above 55 years of age and retired defence personnel above 50 years of age can also invest, provided they invest within one month of receiving their retirement benefits. It is important to note that Non-Resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not eligible to open an SCSS account.

Where to Open an Account

SCSS accounts can be opened at post offices or authorised banks in India. The following banks offer the scheme:

• Central Bank of India
• Indian Overseas Bank
• Oriental Bank of Commerce
• Punjab National Bank
• State Bank of Bikaner & Jaipur
• State Bank of Hyderabad
• State Bank of Mysore
• State Bank of Patiala
• United Bank of India

Minimum and Maximum Deposit

The minimum deposit amount to open an SCSS account is Rs. 1,000, while the maximum deposit is Rs. 30 lakh. The deposit can be made in multiples of Rs. 1,000. If the deposit exceeds the maximum limit, the excess amount will be refunded to the account holder immediately.

Interest Rates and Payments

The interest rate offered under the SCSS is currently 8.2% per annum. This rate is applicable from 1st April 2024 until 31st March 2025. The interest rate is payable quarterly and is fully taxable. The interest will be credited to the individual's account on the first date of April, July, October, and January. It is important to note that the interest rate is subject to review and revision every quarter.

Tenure

The maturity period of the SCSS is 5 years. However, individuals can extend the maturity period for an additional 3 years by submitting an application during the last year of the initial 5-year period. The extension can be done only once, and the interest rates applicable at the time of the extension will apply.

Withdrawals and Closure

Premature withdrawals and account closures are permitted under the SCSS. However, there are certain conditions and penalties associated with early withdrawals. If the account is closed before completing one year, the interest paid will be recovered from the principal amount. If the account is closed after one year but before two years, a penalty of 1.5% will be deducted from the principal amount. If the account is closed after two years, a penalty of 1% will be levied on the principal amount.

Tax Benefits

Under Section 80C of the Income Tax Act, 1961, individuals are eligible for tax deductions on investments up to Rs. 1.5 lakh. However, if the total interest income in all SCSS accounts exceeds Rs. 50,000 per annum, Tax Deducted at Source (TDS) will be applicable.

Small bank FDs

Small finance banks (SFBs) offer interest rates ranging from 8% to 9% on select fixed deposits (FDs). These rates are significantly higher than those offered by top lenders like State Bank of India (SBI), HDFC Bank, ICICI Bank, and Axis Bank. Senior citizens get an additional 50 basis points on these deposits compared to general customers.

FDs in small banks are a good option for those looking for higher returns than regular bank FDs without having to worry about liquidity issues. There are no lock-in periods or restrictions on withdrawals in case of emergencies, such as sickness or death in the family.

FDs are a popular way to save money in India due to their low-risk nature, tax benefits, and fixed interest rates. They are also easy to open, safe, and secure, and can be used to earn interest on deposits. However, it is important to note that fixed deposit investments are not as liquid as other investments. When investing in a bank FD, you typically agree to keep your money in the account for a certain period, and early withdrawals may result in penalties.

FDs in small banks can be a great option for those seeking higher returns and flexibility.

Frequently asked questions