Best Investment Options for Senior Citizens in India

Table of Content

1. Senior Citizen Savings Scheme (SCSS)

2. Pradhan Mantri Vaya Vandana Yojana (PMVVY)

3. Post Office Monthly Income Scheme (POMIS)

4. Senior Citizen Fixed Deposits

5. Fixed Deposit

6. Systematic Deposit Plan

7. Mutual Funds

8. National Pension System (NPS)

9. Equity Linked Savings Scheme (ELSS)

10. Pension Plans

11. Summary

12. FAQs on Investment Options for Senior Citizens

Retirement marks a well-deserved transition, but financial security remains paramount. As individuals approach their retirement years, it becomes essential to plan for a financially secure future. Senior citizens in India need investment options that not only provide steady income but also offer security and stability.

In this article, we will explore the best investment options for senior citizens, their eligibility criteria, interest rates, investment amounts, time periods, withdrawal policies, tax consequences, and other important details.

Senior Citizen Savings Scheme (SCSS):

Indian retirees search for investment plans that provide a secure and steady source of income. Many consider the most reliable investment options for senior citizens to be those guaranteed by the government, such as the Senior Citizen Saving Scheme (SCSS) introduced by the Government of India in August 2004.

SCSS is a savings scheme backed by the central government, serving as a completely risk-free debt instrument. Specifically designed for individuals aged 60 and above, it ensures a stable income throughout the investment period.

• Who can apply?

This senior citizen investment plan is designed specifically for Indian individuals who are 60 years of age or older. It is not open to Hindu Undivided Families (HUFs) or Non-Resident Indians (NRIs). The only exceptions to the age requirement are individuals who choose to participate in the Voluntary Retirement Scheme (VRS) or Superannuation between the ages of 55 and 60, or retired defence personnel between the ages of 50 and 60.

• Interest rate

The current interest rate offered by this plan for senior citizens is 8.20%^a. These rates are evaluated every quarter, with the most recent review taking place on March 31, 2021. This new rate applies only to new deposits made after that date and not to existing ones.

Though the rates for the Senior Citizen Savings Scheme (SCSS) are subject to potential quarterly revisions, these changes will not affect existing investors. New interest rates will only apply to investors who enrol during a particular quarter.

• Amount to invest

The maximum investment amount in the SCSS is Rs. 30 Lakh, while the minimum is Rs. 1000. You have the option to invest a lump sum individually or jointly. The total investment across all your accounts in this scheme cannot exceed Rs. 30 Lakh. Debate and discussion on this matter are ongoing among market observers. After making your initial investment, you will receive interest payouts every quarter.

Payments from this senior citizen scheme are made on the first days of April, July, October, and January, depending on your date of investment. Unlike other fixed-income options, reinvesting the interest is not permitted, as the scheme aims to provide regular income to senior citizens.

• Time period

The maximum tenure of the Senior Citizen Savings Scheme is 5 years. After this period, the scheme can be extended for an additional 3 years, but this option is available only once. It is important to note that upon extension, the prevailing interest rates for that particular quarter will apply.

These actions are seen as a means of protecting the hard-earned savings of senior citizens and providing them with flexible benefits in line with market conditions, overall financial performance, and inflation.

• Withdrawing money ahead of time

SCSS accounts can be closed prematurely after one year from the date of opening, but not before that. This is not designed as a short-term investment. If you choose to close the account before completing 2 years, a penalty of 1.50% of the deposited amount will be levied.

After 2 years, the penalty decreases to 1% of the deposited amount. For accounts that are extended for 3 years after the 5 year maturity mark, the account can be closed after the first year without incurring any penalty. Furthermore, the account can be transferred anywhere in India.

• Tax consequences

While the Senior Citizen Savings Scheme offers benefits in terms of returns and tenure, it is essential to consider the tax implications before investing. It falls under the ETT category, which stands for Exempt-Taxed-Taxed. This means that the investment amount is exempt from taxation, but the interest income is taxed based on your income tax slab, and the maturity amount is again taxed under section 80C.

Furthermore, if the interest income from this senior citizen investment plan exceeds Rs. 50,000 in a financial year, Tax Deducted at Source (TDS) will also be applicable. The primary goal of this investment option for senior citizens is to ensure regular income post-retirement for a period of at least 5 years.

Considering all the factors, this investment option for senior citizens has a medium-risk profile, especially when compared to options like PPF, which are low-risk but were more appealing to senior citizens when there were fewer retirement investment avenues available, compared to the current array of options. The assurance of regular income and capital protection has made the SCSS a popular investment avenue since its inception.

Pradhan Mantri Vaya Vandana Yojana (PMVVY):

In 2017, the government introduced the Pradhan Mantri Vaya Vandana Yojana, a retirement-cum-pension scheme for senior citizens. This scheme provides a fixed sum regularly to investors who put in a lump sum amount. Initially offered from May 4, 2017, to March 31, 2020, it was later extended for an additional 3 years, up to March 31, 2023.

• Who can apply?

Applicable for Indian citizens aged 60 and above, the Pradhan Mantri Vaya Vandana Yojana is exclusively reserved for senior citizens with no maximum age limit. NRIs are not eligible for this scheme.

• Interest rate

The interest rate for this investment plan ranges close to 8% per annum, varying depending on the chosen payout period. However, the Union Budget of 2018-19 revised the interest rate to 7.40% for 2020-21, with the rate to be re-analysed and re-set each year until March 31, 2023.

• Amount to invest

The minimum purchase price for this scheme starts at Rs.1.50 Lakh, while the maximum purchase price is Rs.15 Lakh, which was increased from the initial Rs.7.50 Lakh after the first year.

• Time period

The policy term is 10 years, and the payouts can be monthly, quarterly, half-yearly, or yearly. A loan of up to 75% of the purchase price can be availed after 3 years in the scheme.

• Withdrawing money ahead of time

Premature closing is permitted in the event of a critical or terminal illness, where the surrender value is 98% of the initial investment amount or purchase price.

• Tax consequences

The scheme has tax implications where the investment amount is exempt from tax, but the interest income and maturity amount are taxable as per the income-tax slab. TDS is not deducted from the interest amount, and there is no tax deduction benefit under section 80C. Furthermore, there is no GST on the purchase.

Post Office Monthly Income Scheme (POMIS):

The Post Office Monthly Income Scheme falls under the jurisdiction of the Finance Ministry. Senior citizens can invest in this scheme and receive a fixed monthly interest. This low-risk monthly income plan offers significant capital protection, ensuring financial security during retirement.

• Who can apply?

What distinguishes this scheme from others we have discussed is that it's not limited to senior citizens. Any Indian citizen aged 10 years and above can participate in the POMIS. To invest, simply visit your nearest post office, complete and submit the required form, and provide the necessary documentation.

You can deposit the investment amount in cash or by cheque. Furthermore, a POMIS account can easily be transferred to a different city at a later date at no additional cost, which is beneficial for investors anticipating relocation within India.

• Interest rate

As of June 2023, the Post Office MIS scheme offers an interest rate of 7.40% p.a., which is subject to change every quarter. Although this rate is not as high as that of SCSS or PMVVY, it is considered a competitive interest rate in today’s market. Also, both the minimum and maximum investment amounts are lower compared to other schemes, so the applicable interest cannot be expected to be as high. Given the assurance of a fixed income throughout the investment term, this scheme is popular among Indian senior citizens.

• Amount to invest

The minimum investment amount to open a POMIS account is only Rs 1500, making it accessible to residents in India's smaller cities and rural areas. It offers a maximum investment of Rs 4.5 lakh under a single name and Rs 9 lakh under a joint account. As the name suggests, the Post Office MIS provides a monthly payout, ensuring investors receive a fixed and guaranteed income on a regular basis. You can receive the monthly interest directly from the post office or transfer it to your savings account via ECS.

• Time period

POMIS requires a minimum investment period of 5 years. After maturity, you can reinvest in the same scheme for another 5 years and receive double benefits, or withdraw the funds entirely. Additionally, the newly introduced Post Office Recurring Deposit is another way to reinvest the funds.

• Withdrawing money ahead of time

If funds are needed before the 5 year maturity period, you can request a withdrawal after at least 1 year has elapsed. A penalty of 2% applies for withdrawals between Years 1 and 3, and a 1% penalty for withdrawals between Years 3 and 5.

• Tax consequences

Returns from the Post Office MIS scheme are not subject to TDS. However, the returns are considered income from interest and are therefore taxable according to the investor's slab rate. This categorises it under the ETT category, similar to the tax treatment of the Senior Citizens Savings Scheme and Pradhan Mantri Vaya Vandana Yojana. After maturity, tax is payable on the principal amount received. Your 5-year POMIS investment does not qualify for tax benefits under Section 80C.

Senior Citizen Fixed Deposits:

Amidst the COVID-19 outbreak, there were heightened financial concerns among investors, particularly senior citizens, who rely heavily on interest income and have fewer working years left. Given the direct impact of the pandemic on interest rates, the Senior Citizen Fixed Deposit Scheme was introduced to provide regular income to individuals aged 60 and above. This investment option for senior citizens was launched in May 2020 and was open for investment until June 30, 2021.

• Who can apply?

The Senior Citizen FD is open to all Indian residents aged 60 and above and can also be availed by NRI senior citizens through their NRE or NRO accounts. Some banks may allow individuals over 55 who have taken early retirement to apply for this investment. The terms and conditions may vary from bank to bank.

• Interest rate

Interest rates for the Senior Citizen FD vary among banks due to the short window and market fluctuations caused by the global crisis. Currently, major banks offer interest rates of up to 7.80% p.a^b., while Small Finance Banks provide rates of up to 9.75% p.a^c. on Senior Citizen Fixed Deposits, which is almost 1.20% higher than regular FD rates.

• Amount to invest

The minimum deposit amount under this scheme is Rs.5,000 for online bookings and Rs.10,000 for bookings at a bank branch. The maximum investment amount is determined by individual banks but is usually capped at Rs.2 crores.

• Time period

Senior Citizen Fixed Deposits have tenures ranging from 180 days to 1, 3, and 5 years. Depending on the chosen lock-in period, interest can be paid out monthly, quarterly, half-yearly, or yearly, with the interest being credited to the savings account.

• Withdrawing money ahead of time

Premature closure of the Senior Citizen FD is allowed at any time, subject to a 1% penalty, except for the 5-year Tax Saver Fixed Deposit.

• Tax consequences

This investment option falls under the ETT category, offering tax-free FD interest of up to Rs. 50,000 per year for Senior Citizens. Investing in this scheme should be considered after assessing all other active bank fixed deposits.

Opting for the maximum 5-year lock-in tax-saving FD can provide tax deductions of up to Rs.1.50 lakh under Section 80C of the Income Tax Act, 1961¹. It's important to note that interest rates are subject to change without prior notice, and the fixed deposit can be used as collateral for a loan.

Fixed Deposit:

Fixed Deposits (FDs) have long been a favoured investment choice for senior citizens in India due to their inherent safety and guaranteed returns. These deposits offer a predetermined interest rate for a fixed tenure, providing a predictable and stable income stream to supplement pensions and other retirement benefits.

Furthermore, FDs are considered a low-risk investment, as the principal amount is guaranteed by the bank upon maturity. This feature offers peace of mind to risk-averse individuals seeking to preserve their capital.

• Fixed deposits offer attractive interest rates

Fixed Deposits (FDs) are a popular choice for senior citizens in India due to their inherent safety and guaranteed returns. Many banks and financial institutions offer competitive interest rates on FDs, specifically catering to senior citizens.

These rates are often higher than those offered on regular FDs, providing a steady stream of income to supplement pensions or other retirement savings. The fixed nature of the deposit and interest rate also provides peace of mind, allowing seniors to plan their finances with greater predictability.

• Option for regular payments

Fixed Deposits (FDs) offer senior citizens a reliable source of regular income. These deposits lock in your principal amount for a chosen tenure (ranging from a few months to several years) and guarantee a fixed interest rate throughout the term.

This predictability allows seniors to plan their finances effectively, as they can anticipate a steady stream of interest payments deposited directly into their bank accounts at regular intervals. This feature makes FDs a valuable tool for managing monthly expenses and ensuring financial security during retirement.

Systematic Deposit Plan

The Systematic Deposit Plan (SDP) combines the features of a SIP and FD. Instead of depositing a large amount at once, you can make small monthly deposits similar to how a SIP operates. Each monthly deposit is treated as a separate FD, and the prevailing interest rate is applied to each deposit. You can get started with a monthly deposit amount as low as Rs. 5,000.

The Systematic Deposit Plan (SDP) offers two variants: the Single Maturity Scheme (SMS) and the Monthly Maturity Scheme (MMS), which differ in payout frequency. You can estimate your returns before investing using the Monthly Maturity Scheme calculator and the Single Maturity Scheme calculator. The key features of a SDP are discussed below:

• The minimum monthly deposit amount is Rs. 5,000.
• You can benefit from attractive interest rates of up to 8.85% p.a.
• You have the flexibility to invest for a period of 12 to 60 months.
• You can make multiple deposits ranging from 6 months to 48 months.
• The latest interest rates apply to each new deposit made.
• The entire investment process can be completed online from start to finish.

Mutual Funds

Mutual funds gather money from numerous investors and invest it in various asset classes such as Equity and Debt. These funds are overseen by professionals known as fund managers, who ensure that the fund's investment objectives are achieved. Unlike most fixed-income investment tools, which generally provide returns at the same rate as inflation, mutual funds have the potential to outperform inflation by a significant margin.

As you move into retirement, your willingness to take risks decreases, and the safety of your capital becomes paramount. An investment primarily in mutual fund schemes focused on equity may subject you to a level of unpredictability that might be uncomfortable, particularly in the short term. Therefore, you may opt to instead invest in Debt Mutual Funds or Hybrid Mutual Funds with minimal or no exposure to equity. The decision can be made based on your risk tolerance and future objectives.

• Returns

Different types of Mutual Funds have varying levels of exposure to different types of assets, resulting in different levels of returns. Mutual fund returns are tied to the market and are thus not guaranteed. However, within this risk exposure lies the potential for wealth accumulation and growth.

If you are retired and looking to invest your money in the short term, you can consider short-term Debt Funds, which invest in bonds that are lent to companies with a good credit rating for 1 to 3 years. These Debt Funds may provide better returns than a bank fixed deposit.

Also, if you desire exposure to both Debt and Equity investments, you can consider investing in Conservative Hybrid Funds, which allocate 10-25% of their funds to equities and 75-90% to debt securities. While the debt portion offers the security of capital and consistent returns, equity exposure provides opportunities for wealth creation. Below are the category average returns for 10 years –

• Investment Amount

You can commence a Systematic Investment Plan (SIP) in these funds if you want to invest on a monthly basis or make a lump sum investment. Most SIPs start with as low as Rs. 500 per month but may vary by fund.

• Tax Implications

Upon redemption of your investments, under current mutual fund taxation regulations, you are required to pay capital gains tax on the profits. For Debt Funds and Debt-oriented Hybrid Funds, such as conservative hybrid funds, gains from investments held for less than 3 years are subject to short-term capital gains tax (STCG), and you are obligated to pay tax based on your income tax bracket.

If the redemption is made after holding the investments for at least 3 years, the profits are classified as long-term capital gains tax (LTCG). You are required to pay 20% tax on LTCG after indexation.

National Pension System (NPS):

National Pension Scheme (NPS) is a government-initiated retirement savings scheme in India. It was launched in 2004 with the objective of providing a steady income source to individuals during their post-retirement years. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and offers an attractive investment opportunity, especially for employees from the organised and unorganised sectors. It allows individuals to contribute a portion of their income towards a retirement account, which is managed by professional fund managers appointed by the PFRDA.

The contributions made by both the employees and their employers are invested in a diversified portfolio comprising various financial instruments such as government bonds, equities, and corporate bonds. The scheme provides flexibility to the subscribers in terms of choosing their investment options and also allows them to switch between different fund managers based on their preferences. Furthermore, the NPS offers tax benefits under Section 80C and Section 80CCD(1B) of the Income Tax Act, making it an attractive long-term investment option for individuals.

• Who can apply?

Any Indian citizen, resident or non-resident, between the ages of 18 and 70 can enrol. This makes NPS a suitable option for those approaching retirement who have not built a sufficient corpus or even young individuals seeking a long-term investment strategy. Additionally, NPS caters to salaried and self-employed individuals, providing flexibility for various employment sectors.

• Time period

Unlike fixed deposits with a defined maturity date, NPS offers flexibility. You can contribute throughout your working years, allowing your corpus to benefit from potential market growth over a longer tenure. This extended time horizon can significantly enhance the final pension amount you receive upon retirement.

• Withdrawing money ahead of time

The National Pension Scheme (NPS) is a long-term retirement savings plan ideal for senior citizens seeking guaranteed income post-retirement. However, NPS limits accessibility to the principal amount until retirement.

While there are provisions for partial withdrawal after three years for specific reasons like a child's education or house purchase, early withdrawal comes with penalties and reduces the overall retirement corpus. NPS is best suited for those who can invest for the long term and prioritise a steady pension stream upon retirement.

• Tax consequences

Contributions made towards NPS are deductible from your taxable income under Section 80CCD(1) and 80CCD(1B), potentially lowering your tax liability. Additionally, at maturity, a portion of the corpus withdrawal is tax-exempt.

Equity Linked Savings Scheme (ELSS):

Equity Linked Savings Scheme (ELSS) is a tax-saving mutual fund scheme in India that primarily invests in equities or equity-related instruments. ELSS aims to generate wealth over the long term by investing primarily in equity markets, providing investors with an opportunity to participate in the growth potential of the Indian stock market. It offers the dual advantage of potential capital appreciation along with tax benefits.

The minimum investment in ELSS varies from scheme to scheme, giving investors the flexibility to choose options that suit their investment capacity and risk tolerance. However, it is important to note that investments in ELSS are subject to market risks, and individuals should carefully assess their risk appetite before investing in this scheme. ELSS can be an attractive investment option for individuals looking for tax-saving opportunities while aiming to generate wealth over the long term through equity investments.

• Who can apply?

Equity Linked Savings Schemes (ELSS) are open to all Indian residents, including senior citizens. However, due to the inherent volatility of the stock market, ELSS might not be suitable for everyone nearing retirement.

• Time period

ELSS comes with a mandatory lock-in period of three years from the investment date. This might not be suitable for seniors seeking immediate access to funds.

• Withdrawing money ahead of time

ELSS offers attractive tax benefits but comes with a lock-in period of three years. This may not be suitable for senior citizens who may need ready access to funds for emergencies or medical care.

• Tax consequences

ELSS offers a compelling tax benefit for senior citizens. Investments in ELSS qualify for a deduction under Section 80C of the Income Tax Act¹, potentially reducing your taxable income and lowering your tax liability. Additionally, capital gains from ELSS held for more than one year are taxed at a concessional rate of 10% on profits exceeding Rs. 1 lakh. This makes ELSS an attractive option for tax-conscious senior citizens seeking to maximise their post-retirement income.

Pension Plans:

Pension plans offered by financial institutions and the government provide senior citizens with a safety net and peace of mind in their golden years. These plans offer two key benefits: life coverage and guaranteed² regular income.

• Life Coverage:

Some pension plans come with a life insurance component. This provides a death benefit to your designated beneficiary in case of your passing. This financial cushion can ensure your loved ones are taken care of even after you are gone.

• Guaranteed Regular Income:

Pension plans are designed to provide a steady stream of income after retirement. Unlike fixed deposits (FDs) that mature in a lump sum, these plans offer regular payouts, monthly or annually, depending on the chosen plan. This guaranteed income helps you manage your post-retirement expenses effectively and maintain your desired standard of living.

• Who can apply?

Pension plans in India cater to a broad spectrum of individuals. Citizens between 18 and 60 years old can typically enroll, allowing them to start planning for a secure and comfortable retirement early on.

• Tax implication:

Certain retirement plans offer tax benefits as outlined in Section 80C. If you are considering investing in a retirement plan, the Income Tax Act 1961¹, provides substantial tax relief under Chapter VI-A. Section 80C, 80CCC, and 80CCD provide detailed information about these benefits. For example, the Atal Pension Yojana (APY) and the National Pension Scheme (NPS) are eligible for tax deductions under Section 80CCD.

• Time period:

Pension plans offer a range of investment tenures, allowing senior citizens to tailor their plan to their specific needs. Some plans provide immediate annuity payments upon enrollment, while others offer a deferral period, allowing the investment to accumulate for a set timeframe before payouts begin. This flexibility ensures senior citizens can choose a plan that aligns with their retirement income goals.

Summary

Senior citizens in India have a range of investment options suited to their specific financial requirements. The Senior Citizen Savings Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), Post Office Monthly Income Scheme (POMIS), Senior Citizen Fixed Deposits, National Pension System (NPS), and Equity Linked Savings Scheme (ELSS) are some of the best investment options for senior citizens to secure their financial future. Consideration of eligibility criteria, interest rates, time periods, and tax implications is vital for making informed investment decisions tailored to individual needs.

FAQs on Investment Options for Senior Citizens

1. Which is the best investment option for senior citizens?

The best investment option for senior citizens can vary based on individual financial goals and risk tolerance. However, the Senior Citizen Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY) are popular choices due to their attractive interest rates and tax benefits.

2. Which scheme is best for senior citizens?

Both the Senior Citizen Savings Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY) and senior citizen fixed deposits are considered excellent schemes for senior citizens, offering competitive interest rates, reasonable investment limits, and tax benefits. The choice depends on individual preferences and financial objectives.

3. What is the high return for senior citizens?

While the returns may vary, investment options like mutual funds and equity-linked savings schemes have the potential to offer higher returns for senior citizens compared to traditional fixed-income options.

4. What is the best investment mix for a 65-year old?

For a 65-year-old, the best investment mix may include a combination of stable fixed-income options such as the Senior Citizen Savings Scheme (SCSS) or Post Office Monthly Income Scheme (POMIS), along with moderate exposure to equity-based instruments like equity mutual funds to generate higher returns for long-term financial security.

5. How much FD interest is tax-free for senior citizens?

The interest earned from fixed deposits (FD) is taxable for senior citizens. However, under Section 80 TTB of the Income Tax Act¹, senior citizens can avail of tax exemption of up to Rs.50,000 on the interest earned from FDs.

6. Which is better, SCSS or mutual fund?

The choice between the Senior Citizen Savings Scheme (SCSS) and mutual funds depends on an individual's risk tolerance and investment goals. SCSS provides a fixed return with capital protection, while mutual funds offer the potential for higher returns with a certain degree of market volatility. It is advisable to consult a financial advisor to determine the most suitable option based on personal circumstances.

 Sources-

a. https://www.paisabazaar.com/saving-schemes/senior-citizen-savings-scheme/

b. https://sbi.co.in/web/personal-banking/investments-deposits/govt-schemes/senior-citizens-savings-scheme

c. https://www.forbes.com/advisor/in/banking/fixed-deposit-interest-rates/

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