Personal Finance

Where to invest to get a monthly income

Keerthi Sanagasetti | Updated on November 21, 2019 Published on November 21, 2019

From post-office schemes, bank/NBFC FDs, annuity plans of insurance firms to MFs’ systematic withdrawal plans, there are many options depending on your risk appetite

Are you looking to invest a lumpsum such that you can earn a monthly income? From simple bank fixed deposits (FDs) to systematic withdrawal plans (SWPs) in mutual funds, there are a handful of options. Here’s a low-down on the products and their suitability for various investors.

Safe-haven choices

 

For those who don’t have any appetite for risk, the post office monthly income scheme (POMIS), which is open for all age groups, and the Pradhan Mantri Vaya Vandana Yojana (PMVVY), eligible for those aged 60 and above, are the safest options. These products have an implicit government backing.

If you don’t mind quarterly payouts, the post office Senior Citizens Savings Scheme (SCSS) is a good choice for seniors.

Post office MIS: The POMIS currently offers an interest rate of 7.6 per cent per annum. However, the investment amount is capped at ₹4.5 lakh per person. In the case of a joint account, investment can be up to ₹9 lakh.

While the POMIS has a maturity period of five years, premature withdrawal is allowed after one year, post deducting 2 per cent of the deposit. However, if the withdrawal is made after three years, only 1 per cent of the deposit is deducted.

Interest on Post Office Savings Schemes is taxable at slab rates under the head ‘Income from Other Sources’ (IOS).

PMVVY: Another choice for seniors is the monthly payout option in PMVVY. The scheme currently yields 8 per cent return per annum for this frequency. The tenure is fixed for 10 years.

The minimum and maximum investment amounts (purchase price) are ₹1.5 lakh and ₹15 lakh respectively, for monthly payouts. If you are fine with the quarterly payout option, you can invest in the SCSS as it offers a higher rate of 8.6 per cent.

Pension earned under the PMVVY and interest from the SCSS are taxable under IOS at slab rates. Investment in the SCSS can be claimed as a deduction under Section 80C.

While no such exemption under the Income Tax (IT) Act, 1961 is available for the premium paid for the PMVVY, it is exempt from GST.

Immediate annuity: Another option is the immediate annuity plan offered by insurance companies.

Here, you can start receiving monthly payouts immediately upon investing a lumpsum (single premium/purchase price).

However, such immediate annuity plans score lower on returns. As a ballpark, the best plan may offer only 6 per cent return (calculated as internal rate of return or IRR). Annuity income is taxed at slab rates under IOS.

To sum up, seniors seeking monthly payouts can opt for PMVVY, given the superior returns. Any amount left over and above the ₹15-lakh limit, can be parked in POMIS.

For individuals looking for products with near- zero risk, POMIS would be the better bet over an immediate annuity plan, considering the returns.

Low to medium risk

Those with some appetite for risk can consider fixed deposits. Currently, the interest rates offered range from 5.5 per cent to 7.85 per cent for various tenures. Small finance banks tend to offer slightly higher rates — 7 to 9 per cent across tenures.

Generally, bank FDs pay interest at quarterly rests. Most banks, however, also offer monthly payouts on their FDs upon request. But the investor should keep in mind that the interest rate could be marginally lower for monthly payouts compared with other options.

Bank FDs: That apart, some banks have come up with tailor-made products which pay interest at monthly rests. For instance, ICICI Bank’s Fixed Deposit Monthly Income Option. This is different from a plain vanilla FD in the sense that the tenure involves an investment phase and a payout phase.

As the names indicate, the investor earns monthly payouts only during the payout phase. Each phase is for a minimum period of 24 months. Considering an example where the minimum period is opted for, the interest gets compounded quarterly at a rate of 7.25 per cent per annum over the investment phase. In the payout phase that follows, the investor is paid monthly instalments and the remaining amount continues to fetch interest.

NBFC FDs: If you are nimble, you can maximise the interest earned on bank deposits by keeping tabs on the rate cycle. For instance, you can lock into longer tenure deposits when the interest rate peaks.

Investors with a marginally higher risk appetite can consider deposits offered by NBFCs with good credit rating. Generally, the higher interest rate offered by NBFCs compared to banks, compensate for the higher risk.

For instance, AAA-rated Bajaj Finance currently pays interest in the range of 7.72 to 8.05 per cent per annum depending upon the tenure, for its monthly payout option.

Interest income earned on FDs of banks or NBFCs, is taxable under IOS. In the case of interest earned on bank FDs alone, senior citizens can claim a deduction of ₹50,000 under Section 80TTB of the IT Act, 1961.

Market-linked risk

SWPs: If you have the appetite to invest in market-linked products, systematic withdrawal plans (SWPs) in mutual funds could be an avenue.

SWPs are the opposite of systematic investment plans or SIPs. Under an SWP, an investor instructs the AMC to pay out a sum by redeeming units of his mutual fund, at set intervals.

Depending on your risk appetite, you can choose from a range of debt and equity funds to invest in and withdraw from. If you begin your withdrawals immediately after investment, be mindful of the exit loads charged by various AMCs.

Since an SWP is nothing but redemption of units, gains, if any, on each withdrawal will be taxed as capital gains under the IT Act.

For equity-oriented funds, the gains shall be short-term and taxed at 15 per cent, if the period of holding does not exceed 12 months. If held for more than 12 months, long-term gains beyond ₹1 lakh will be taxed at 10 per cent.

In the case of any other fund held for more than 36 months, long-term capital gains at 20 per cent will apply (with indexation benefit).

If held for a lower period, short-term capital gains shall be included in the total income of the individual and taxed accordingly.

Published on November 21, 2019
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