In the current time when given the economic fallout and controlled inflation levels, the government has been steadfastly lowering down on interest rates, here we have 2 safe options if you have a longer term horizon to yield in to for better returns. As it the different NCDs opened by various NBFC including gold finance companies do provide a higher return but they come with their own inherent risks.
So, the current time bodes well for these instruments as they guarantee safe returns:
1. NSC: It is a small savings scheme offering of a post office and currently offers an attractive rate of 7.9%. The scheme comes with a lock in of 5 years. On a quarterly basis, the government revises the rate of NSC and other savings scheme basis the yield on 10-year government bonds and for the October-December, the rates are slated to go still lower.
2. RBI savings bond: It also offers a higher return of 7.75% more than the yield in case of 5-year FD at a bank. SBI on its FD for 5 year term fetches a return of just 6.25%. The tenure is 7 years for the government bond and interest is paid semi-annually. Note these are available at nationalized banks or some of the private lenders.
Both the concerns of safety as well as good enough returns are provided as the past several defaults on debt instruments has made investors worried. In the list was the latest crisis at the Mumbai based PMC Bank which has fair share in one of the NPA account leading to all the trouble. Before it the failure of Altico Capital to pay the obligated amount to its deposit holders is causing all the worry.
But being a sovereign backed instrument, safety needs of investors are well checked in case of these instruments.
Though there is a compulsorily lock in period of 5 and 7 years in the case of NSC and Bond, respectively. There is a respite given in the form of allowed early redemption to senior citizen category. For those who are aged between 60-70 years, the redemption is allowed after six years from the date of issue of the instruments while in the case of 70-80 years bracket, the withdrawal is permitted after 5 years. . Investors aged 80 and above can withdraw after four years from the date of issue. In the case of joint holders, these rules will apply if even one of the holders fulfils the conditions mentioned above.
Taxation rules: For investment up to Rs. 1.5 lakh towards, NSC allows a relief as deduction under section 80C while there is no such relief when it comes to 7.75% RBI savings bonds.
Also, the interest on these will be added to your total earnings and shall be taxed as per your tax slab in accordance with the Income Tax Act 1961.
So, do consider your overall risk appetite and investment goals, to devise your investment strategy that just comes apt on all of the parameters of risk, return and liquidity.