Now FDs with 8% interest for senior citizens: Should you invest?

Exhaust the post office scheme limit before investing in this

Senior citizens looking for a regular monthly income will soon have an additional option to choose from. The new fixed deposit (FD) scheme announced by Prime Minister Narendra Modi in his speech on December 31 will offer 8 per cent interest for a period of 10 years. The maximum amount that can be invested is Rs 7.5 lakh and interest will be paid monthly.

Other details like options for premature withdrawal, taxability — whether at the time of investment or withdrawal — etc are not known yet. But going by the interest rate and lock-in period the new FD is a good option if it is combined with other savings products. 

“The interest rate is lower than the Post Office Senior Citizens Savings Scheme (POSCSS) which offers 8.5 per cent. But it has a risk of reinvestment after five years. In the case of the new FD investors have a clear 10-year time frame to lock in at the 8 per cent rate,’’ says Anil Rego, Founder, Right Horizons Financial Services.

At 8 per cent rate, a deposit of Rs 7.5 lakh would fetch an annual income of Rs 60,000 per annum or Rs 5,000 per month. Hence, the new FD is a good option for those senior citizens who are in the lower tax bracket and are looking for secure, regular income, says Mimi Parthasarathy, Managing Director, Sinhasi Consultants. 

Interest rates are expected to remain benign over the next two to three years. Therefore, rates on all fixed income products are likely to come down. Bank FDs have already started coming down. Banks usually offer senior citizens 25 to 50 basis points higher interest rate on FDs. Recently the Employee Provident Fund rate was reduced to 8.65 per cent and it is possible that the interest rates on Post office deposits too would be reduced. 

"Since the POSCSS currently offers a higher rate, a higher limit and shorter lock-in period, investors must first exhaust that limit before investing in the new FD. Investors whose bank FDs are closer to maturity and up for renewal can also opt for the new FD to take advantage of the higher interest rate," adds Parthasarathy.

The income tax limit for senior citizens who are above 60 years and less than 80 years is Rs 3 lakh, while it is Rs 5 lakh for super senior citizens, that is, those above 80 years. 

The taxability of the new FD is not known yet. But if it will be taxed like bank FDs, it will not benefit those in the higher tax bracket. Such investors can look at monthly income plans (MIP) of mutual funds as these would be more tax efficient, says Rego. "The MIP have some equity portion and hence would be slightly riskier. But they will offer higher returns. Hence, investors can look at a combination of MIP and the new FD," he adds. 

Post Office Monthly Income Schemes which currently offer 7.7 per cent payable monthly are another option that investors can consider. 

It is unlikely that premature withdrawal will be permitted, but there could be an emergency exit with a penalty, similar to the POSCSS says Parthasarathy.