In the past year, we have seen multiple repo rates cuts and a fall in fixed deposit rates as a result. For a significant number of senior citizens in India, interest income from fixed deposits is the main source of earnings to carry on their day-to-day expenses.
After the recent revision, interest on FDs at public sector banks have fallen in the range of 6.5 to 7 percent. This is a direct effect of declining repo rates set by the Reserve Bank of India (RBI) that is trying to increase liquidity in the market to push growth in the economy.
In such a scenario, senior citizens have to look at alternatives to secure earnings from their life-savings.
1. Senior Citizens Savings Scheme (SCSS)
This post-office scheme can also be availed at public and private banks apart from India Post offices. Rates are revised for every quarter, just like other small savings schemes backed by the government.
For the July-September 2019 quarter, the interest rate was set at 8.6 percent per annum.
- It can be availed by anyone above the age of 60 years.
- Minimum deposit required is Rs 1,000. Maximum deposit limit is Rs 15 lakh.
- SCSS can also be jointly opened with spouse.
- It is secure as the scheme is backed by the Government of India.
- Those between 55 to 60 years who have applied for voluntary retirement can also apply.
- NRIs cannot apply.
- The lock-in period is 5 years.
- The scheme can be extended for another 3 years on maturity.
- Interest will be paid to the account holder at the end of every quarter, that is, 31 March/30 June/30 September/31 December.
- The interest earned forms as the source of regular income for the account holder.
- Interest payable is locked on the date of investment. This means that even if the government lowers the interest rate on the scheme after you open an account, you will continue to receive the interest promised on the day of opening the account.
- However, on an extension of the scheme post maturity, the current rates will be applicable.
- Premature withdrawal is allowed after a year with applicable penalties.
Interest earned is completely taxable. However, interest on deposits earned by senior citizens is tax-free up to Rs 40,000 per annum.
TDS (tax deducted at source) will be applicable on interest exceeding Rs 40,000.
Investments made towards SCSS are eligible for tax deduction under section 80C of the Income Tax Act.
2. Small Finance Bank FDs
Small Finance Banks are governed by the provisions of RBI. These banks pay higher interest rate when compared to large commercial banks to attract funds.
For senior citizens, these banks ideally pay 0.10 to 0.50 percent extra interest when compared to regular customers.
Utkarsh Small Finance Bank recently revised its interest rate on deposits made for a tenure of 456 days to less than 2 years to 9 percent for senior citizens. The rate is applicable on deposits made from 18 October 2019.
You can look at other small finance banks that you are comfortable with to get fixed income. Interest rates are currently 8 percent or higher for senior citizens in these small finance banks.
Compared to SCSS, the tenure is shorter, however, it is less secure as the safety of your deposit depends on the bank's performance. Further, you cannot avail tax deduction on investment under section 80C.
3. Debt Mutual Funds
If you are comfortable with taking risks and invest in market-linked options, you could opt for debt mutual funds.
Debt mutual funds largely invest in a mix of fixed income securities like Government Securities, Corporate Bonds, Treasury Bills, other debt securities of different time horizons.
These earn a fixed rate of interest, giving the investor interest income opportunity and come with a fixed maturity period. Further, the money you invested could appreciate or depreciate at the end of the maturity based on the performance of the securities as per market conditions.
You can go to a mutual fund company of your choice and pick a debt mutual fund that suits your risk appetite and earning needs.
There are also different types of debt mutual funds to choose from.