Best Investment Plan For Retirement In India – Once you hang up your boots, generating a steady income during your retirement years is an important requirement, especially if you’re not privileged enough to receive an inflation-adjusted pension. Here are some relatively safe paths for those looking for safe options to generate income after retirement. We have omitted bank deposits, with low interest rates offered. We omitted the Post Office Monthly Income Plan for the same reason.
In this two-part post, we first lay out six safe retirement options for regular income after retirement, then asset allocation, tax- and risk-efficient income generation.
Best Investment Plan For Retirement In India
An instant annuity is a product offered by insurance companies. You pay a large sum of money to an insurance company. At your request, the insurance company provides a pension or a regular income (monthly, quarterly, semi-annually or annually). There is 1.8% GST charged on the purchase price.
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You get a guaranteed fixed allowance for the rest of your life. Your nominee receives the purchase price or premium paid upon your death.
Spot annuity products come in many variations. We consider returning the purchase price for the specified option because all the other options mentioned above return the principal amount invested and most have interest payments every two years. So it’s easier to compare with options that offer regular interest payments.
For someone who survives to 2036, the immediate annualized return ranges from 5.2% to 6.3%. If one lives to 2050, the yield is 5.4% to 6.5%.
Yields are lower than other fixed-income and government bond options. Therefore, investors can mostly ignore this option.
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Due to the recent rate hike by the RBI, many non-banking finance companies (NBFCs) have increased their deposit rates. They come in different terms. Bajaj Finance offers seniors the best interest rate of 7.6% for 44 months.
All of the above deposits have the highest AAA credit rating. Therefore, the payment of interest and principal is guaranteed on time. You can also receive monthly, quarterly, or semi-annual interest on these deposits, but the interest is slightly lower. Investors must be aware that deposit insurance applicable to banks is not available to the NBFC, so there is a risk of default if the NBFC becomes insolvent.
Interest rates in these bonds are not fixed but are pegged at the rate of NSC (national savings certificates), plus 0.35%.
Interest is paid twice a year – in January and July. These bonds have a term of 7 years. RBI Taxable Bonds are available for investment to both senior and non-senior citizens.
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One advantage of this program is that there is no upper limit for investment as is the case with PMVVY and SCSS.
Early withdrawals are only allowed for the elderly. Lock period reduced by one year for every 10 year slab, starting at 60.
You can apply for these bonds at banks such as SBI, Bank of Baroda, HDFC Bank, ICICI Bank and Axis Bank, among others. You may have to go to a bank branch to buy these bonds.
In 2020, the government introduced a new policy (run by the LIC) to provide pensions to the elderly (60 years of age and older). This program has been extended until March 31, 2023. It is a non-affiliated, non-participating program subsidized by the Indian government. Offered interest rate is 7.4%/year.
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In general, the program works like a deposit. You can invest up to Rs 15 lakh in it. With this amount you will get a monthly allowance of Rs 9,250.
So you have to invest Rs 15 lakh – purchase price – to receive monthly, quarterly, semi-annual or annual payments. Interest rates for different payment terms increased slightly. The pension rate is up to 7.66% for annual payments. The table provides the details.
The investment is ten years. At the end of 10 years, you will get back the purchase price (Rs 15 lakh). In the unfortunate event that occurs before ten years, the purchase price is returned to the nominee.
Interest paid by the plan is fully taxed on your application table. There are no benefits or tax deductions available with this plan.
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You can only close your account early for special reasons, such as treating any illness for yourself or your spouse. The resale value is equal to 98% of the purchase price.
The Seniors Savings Program (SCSS) is one of the most popular options available to retirees for a regular income. It is also one of the safest. It is a scheme run by the government of India. SCSS is like a fixed deposit scheme with guaranteed returns and no risk.
The offering rate is 7.4% a year – it has remained at this level for two years. This interest is paid quarterly. Interest rates are reviewed by the government quarterly.
You can open an account at a post office or select banks. ICICI Bank, State Bank of India and Baroda Bank are some of the banks that offer SCSS accounts opened with them. A visit to a bank branch is required as you cannot open SCSS online.
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Only senior citizens can invest in this scheme. However, a few other types of people are also allowed to invest in SCSS.
The following two categories may apply depending on the condition. They should show proof of voluntary retirement. And the retirement proceeds must be invested within one month of receiving them.
The maximum amount you can invest in SCSS account is Rs 15 lakh. At 7.4% you will get Rs 27,750 per quarter as interest. These payments are made in January, April, July and October, usually on the first of those months.
The SCSS account is active for five years. You can extend it for another three years at maturity, which can only be done once.
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Investments up to Rs 1.5 lakh are eligible for deduction under section 80C of the income tax act. Of course, this section competes with a host of other options like home loan principal, PPF (public savings fund), ELSS (equity-linked savings scheme), savings and money 5-year bank deposit, among other options.
Early closures are allowed, but with penalties. No interest is paid on withdrawals within one year of account opening. If you want to withdraw from year 1 to year 2, 1.5% of the principal amount will be deducted as a penalty. For years 2-5, withdrawal will be penalized with 1% of principal reduced and balance will be paid.
One of the relatively unexplored options is to buy government bonds for interest payments that can be used as a retirement pension. This is the safest investment, as government securities have no credit risk. Guaranteed by the sovereign, you are sure to get a return.
Over the past year, inflation has been on the rise. After an extended pause, the RBI (reserve bank of India) raised interest rates twice in two months by a total of 90 basis points. Yields have inched up having skyrocketed on government securities over the terms. Interest rates and bond prices are negatively correlated. So falling bond prices have led to rising yields.
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From around 6% in June 2021, the 10-year G-sec trades at over 7.6% yield. Long-term and mature G-sec for many years to come – 2032, 2035, 2036, 2050 and even 2060 – is now available with attractive yields ranging from 7.57% to 7.87%.
At these levels, the yield is higher than any other regular income option available, with absolute safety. Note, however, that these yields change daily.
These government securities pay interest twice a year, which can serve as pension income for retirees.
First, these bonds pay coupon interest. Coupon rate must not be confused with yield. For example, 06.54 GS 2032 will pay a coupon of 6.54%. This will be the interest payment rate. So for an investment of Rs 1 lakh you will get a total of Rs 6,540 a year divided into two semiannual installments. But the yield is 7.57% because you can buy the bond for less than the original issue price of Rs 100.
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Second, the price you can buy a g-second will determine your profit, which you must know.
Third, you will only receive these interest if you hold the bond until maturity. You can sell the bond earlier if you want, but that means you can get a lower yield.
Interest payments on these bonds are taxed on your table. You will pay capital gains tax on the sale of these bonds at the rate of 10% if you hold them for a year or more.
These bonds can be purchased through the RBI Retail Direct portal. There was a post detailing the process of buying government bonds directly from RBI’s platform. You need to provide your PAN number details and complete the ‘know your customer’ (KYC) process. The g-sec bonds are traded and prices are available on the Clearing Corporation of India website.
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