Senior citizen is defined as someone above the age of 60. Investment options for senior citizens include bank FDs and RDs, post office FDs and RDs, Senior Citizens’ Savings Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), National Pension System (NPS), Life Insurance Premiums and mutual funds. Some of these are low-risk fixed return options like bank and post office FDs, SCSS and PMVVY. Others are relatively high risk but high return options like mutual funds. Ideally a combination of both options should be adopted in order to deliver regular income and wealth creation to a senior citizen.
The Ideal Portfolio for a Senior Citizen
The idea portfolio for a senior citizen should deliver both income and growth. However this also depends on the needs of each individual. For example, senior citizens who are getting a pension from their employer’s may not need regular income. Their portfolios can be more oriented towards growth-delivering mutual funds. Those getting an Employees Pension Scheme (EPS) pension are in a similar position, although the EPS pension may need to be supplemented with other income. Finally, those who have worked in the unorganised sector or in self-employment may not receive any pension at all. Such employees will need a regular income from their investments.
Investments for Monthly Income
These investments give regular income, including regular monthly income and can satisfy a senior citizens’ day-to-day expenses. These include:
Bank Fixed Deposits and Recurring Deposits
Senior citizens get higher interest rates than ordinary customers on bank fixed deposits and recurring deposits, typically 0.5% higher than normal rates. Interest income up to Rs 50,000 per annum is also tax-free for senior citizens under Section 80 TTB of the Income Tax Act, 1961. This includes interest on bank FDs, bank RDs, post office FDs, post office RDs and savings account. Ordinary customers only get tax-free interest up to Rs 10,000 per year under Section 80 TTA of the Income Tax Act, 1961 and that too only from savings accounts. Investments in bank FDs (5 year tenure) are tax deductible up to Rs 1.5 lakh but interest on the same is taxable.
Post Office Fixed Deposits and Recurring Deposits
Post Office FDs and RDs work exactly like bank FDs and RDs with an added layer of safety. The money from post office FDs and RDs goes directly to the government and hence there is almost no chance of default. On the other hand bank FDs/RDs are only protected up to Rs 1 lakh under the Deposit Insurance Credit Guarantee Corporation (DICGC). Post office deposits are also free from TDS deduction, unlike bank FDs/RDs. The Post Office also has a monthly income scheme called Post Office Monthly Income Scheme (POMIS) which provides monthly income. Investments in post office FDs (5 year tenure) are tax deductible up to Rs 1.5 lakh however the interest on the same is taxable.
Senior Citizens Savings Scheme
The Senior Citizens Savings Scheme (SCSS) is a government backed savings scheme. It is more secure than bank FDs since the SCSS money is held with the government. SCSS has a tenure of 5 years which can be extended by another 3 years. SCSS has an interest rate of 8.7%. Investments in SCSS are tax deductible up to Rs 1.5 lakh per annum but the interest on the same is taxable.
Pradhan Mantri Vaya Vandana Yojana
Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a type of fixed deposit (called a pension due to marketing reasons) with LIC (Life Insurance Corporation). It has a tenure of 10 years and an interest rate of 8%. The interest payable under PMVVY is fully taxable. There is no tax deduction on investment in PMVVY under Section 80C. Since PMVVY is held with LIC (Life Insurance Corporation), it is relatively a low risk investment.
Investments for Growth
The following investments provide an element of growth to the portfolios of senior citizens. This can help them keep up with inflation and also leave and inheritance for their families.
National Pension System
NPS has an age eligibility from 18 to 65 which means that senior citizens can also invest in it. Once an NPS account is opened, it can be extended all the way to the age of 70. Investment in NPS is eligible for tax deduction up to Rs 1.5 lakh under Section 80C and up to an additional Rs 50,000 under Section 80CCD(1B). NPS money is invested in equity and debt funds as per the investor’s choice and generate returns. There is thus no fixed interest rate on NPS but the money in it can grow much faster through equity investment. On maturity, 60% of the NPS corpus is tax free. The balance 40% of the NPS corpus must be used to buy an annuity (monthly pension).
Certain life insurance policies act as investment options alongside providing life cover. These include Unit Linked Insurance Plans (ULIPs) and Endowment Plans. However investors should be cautious while investing in such policies and must pick the ones with the lowest charges. Insurance charges include premium allocation charges, policy administration charges, fund management charges, mortality charges etc.
Mutual Funds can bring an element of growth and wealth creation in the portfolio of a senior citizens. There are retirement plans offered by mutual funds however these plans are little more than marketing gimmicks. Instead senior citizens can achieve high investment returns by investing in mutual funds of a general nature. Among equity funds, large cap funds are relatively low risk while mid and small cap funds are high-risk high return. You can view our mutual fund recommendations here.
Equity mutual funds held for longer than 1 year are taxed at just 10% for gains above Rs 1 lakh. If held for less than 1 year, they are taxed at 15%. Debt mutual funds are taxed at slab rate for gains made within 3 years of investment and at 20% with indexation for gains made after 3 years. Indexation reduces the tax liability to account for inflation. A particular category of mutual funds (ELSS) funds are eligible for tax deduction under Section 80C for investments up to Rs 1.5 lakh per annum.