Best Retirement Policy In India

Best Retirement Policy In India – Once you hang up your boots, generating a steady income throughout your retirement is an important requirement, especially if you’re not lucky enough to receive an inflation-adjusted pension. Here are some relatively safe avenues for those looking for safe options for generating a post-retirement income stream. We have neglected bank deposits, given the low interest rates they offer. We skipped the Post Office Monthly Income Scheme for the same reason.

In this two-part post, we first outline six safe retirement options for regular income after retirement, then get into asset allocation, tax-efficient income generation, and risk.

Best Retirement Policy In India

An immediate annuity is a product offered by insurance companies. You pay a large amount of money to the insurance company. According to your needs, the insurance company provides a pension or a fixed income (monthly, quarterly, semi-annually or annually). There is a 1.8% GST charged on the purchase price.

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You get a fixed, guaranteed pension for the rest of your life. Your candidate receives the purchase price or premium paid after your death.

Immediate annuity products have many variants. We consider purchase price returns to the nominee option as all the other options mentioned above return the principal amount invested and most have biannual interest payments. So, the comparison will be easier with options that offer regular interest payments.

For someone surviving to 2036, the immediate annuity yield is anywhere from 5.2% to 6.3%. If the person lives to 2050, the result is 5.4% to 6.5%.

Yields are lower than other fixed income options and government bonds. Therefore, most investors can skip this option.

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In light of the recent increase in interest rates made by the RBI, many non-banking financial companies (NBFCs) have increased their deposit rates. They come in various tenors. Bajaj Finance offers the best rate for senior citizens at 7.6% for 44 months.

All of the above deposits have the highest AAA credit rating. So, timely payment of interest and principal is guaranteed. You can also take monthly, quarterly, or semi-annual interest payments on these deposits, but the rates are slightly lower. Investors should note that deposit insurance applicable to banks is not available for NBFCs, so there is a risk of default if the NBFC becomes insolvent.

The interest rate for these bonds is not fixed but is pegged to the interest rate of the NSC (national certificate of savings), plus an additional 0.35%.

Interest is paid twice a year – in January and July. This bond has a term of 7 years. RBI taxable bonds are available for investment to both senior and non-senior citizens.

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One of the advantages of this scheme is that there is no upper limit for investment like PMVVY and SCSS.

Early withdrawals are only allowed for senior citizens. The lock-in period is reduced by one year for each slab over 10 years, starting at 60 years.

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 visit a bank branch to purchase these bonds.

In 2020, the government introduced a new policy (run by LIC) to provide pensions to senior citizens (aged 60 and over). The scheme has been extended till March 31, 2023. It is a non-linked, non-participating scheme subsidized by the government of India. The interest rate offered is 7.4% per year.

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In general, this scheme works as a deposit. You can invest up to Rs 15 lakh in it. For this amount, you will get a monthly pension of Rs 9,250.

So you have to invest Rs 15 lakh – the purchase price – to get your monthly, quarterly, semi-annual or annual payments. The interest rate applicable to the different payment periods increases slightly. The pension rate rises to 7.66% for annual payments. The table provides the details.

The investment is for ten years. At the end of 10 years, you get back the purchase price (Rs 15 lakh). If an unfavorable event occurs before ten years, the purchase price is returned to the nominee.

Interest paid by the scheme is fully taxable on your applicable plate. There are no tax benefits or deductions available with this scheme.

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You may close your account prematurely for only an extraordinary reason, such as treating any illness for yourself or your partner. The delivery value is set at 98% of the purchase price.

The senior citizen savings scheme (SCSS) is one of the most popular options for retirees for a steady income. It is also one of the safest. This is a scheme run by the Indian government. SCSS is like a fixed deposit scheme with guaranteed returns and no risk.

The interest rate offered is 7.4% per annum – remaining at this level for two years. This interest is paid quarterly. Interest rates are reviewed quarterly by the government.

You can open an account at the post office or certain banks. ICICI Bank, State Bank of India and Baroda Bank are some of the banks that offer SCSS accounts to open with them. A visit to a bank branch is mandatory, because you cannot open SCSS online.

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Only senior citizens can invest in the scheme. However, several other categories of people are also allowed to invest in SCSS.

The last two categories may apply subject to conditions. They must show proof of having taken a voluntary pension. And the proceeds from the pension must be invested within one month of receiving it.

The maximum amount you can invest in a SCSS account is Rs 15 lakh. At 7.4%, you will receive Rs 27,750 quarterly as interest. These payments are made in January, April, July and October, usually on the first day of the month.

SCSS accounts run for five years. You can extend it for another three years after maturity, which can only be done once.

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Investments up to Rs 1.5 lakh are eligible for deduction under article 80C of income tax law. Of course, this section competes with a number of other options such as home loan principal, PPF (public deposit funds), ELSS (equity linked savings schemes), deposit funds, and five-year bank deposits, among others.

Premature closing is allowed, but with a penalty. No interest is paid on withdrawals within one year of account opening. If you want to withdraw money between the first and second year, 1.5% of the principal amount is deducted as a penalty. For years 2-5, withdrawals are penalized by deducting 1% of the principal amount and the remainder is paid.

One relatively under-explored option is to buy government bonds for their interest payments which can serve as a pension for retirees. This is the safest investment, considering that government securities do not carry credit risk. Guaranteed by the authorities, you will definitely get interest payments.

Over the last year or so, inflation has increased. After a long lull, RBI (India’s reserve bank) raised rates twice in two months by a cumulative 90 basis points. Yields that had edged up have soared for government securities across tenors. Interest rates and bond prices are inversely correlated. Thus, a decrease in bond prices has resulted in an increase in yields.

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From around 6% in June 2021, the 10 year G-sec is trading with a yield of just over 7.6%. Long-dated, mature G-secs in the coming years – 2032, 2035, 2036, 2050, and even 2060 – are now available with attractive yields of 7.57% to 7.87%.

At this rate, the yield is higher than any other available regular earning option, with complete security. But note that these results change daily.

These government securities pay interest twice a year, which can serve as retirement income for retirees.

First, these bonds pay a coupon rate. Coupon rate should not be equated 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 receive a total of Rs 6,540 a year in two semi-annual installments. But the yield is 7.57% as you can buy the bond for less than the initial issue price of Rs 100.

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Second, the price you can buy g-sec will determine your results, which is something you should be aware of.

Third, you will get this yield only if you hold the bond to maturity. You can sell the bond earlier if you want, but that means you could end up with a lower yield.

The interest payments on these bonds are taxed on your plate. You will pay capital gains tax on the sale of these bonds at a rate of 10% if you hold them for a year or more.

These bonds can be purchased through the RBI Retail Direct portal. already has a detailed post on the process to follow to buy government bonds directly from the RBI platform. You will need to provide your PAN number details and complete the ‘know your customer’ (KYC) procedure. Traded g-sec bonds and their prices are available from the Clearing Corporation of India website.

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