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Fixed income plans other than Fixed deposits

We all know about the risks associated with investing in Stock Markets and thus prefer to stay away from the same. We also know that Real Estate is always a good investment option but requires a large chunk of cash to be deployed at the time of purchase.

With Stocks and Real Estate not being the preferred option of many due to their inherent limitations, Fixed Income plans have always been a hit in India. They not only offer safe returns but also suit the pocket of every investor.

When we talk about Fixed Income Plans, the first thing that comes to mind is Bank Fixed Deposits. We all are aware about the characteristics of Bank Fixed Deposits, so in this article I’ll try to dig deep into 3 popular Fixed Income Plans in India except Bank Fixed Deposits

I. Public Provident Fund

II. Corporate Fixed Deposits

III. Senior Citizens Saving Schemes

Public Provident Fund

Public Provident Fund was launched by the Govt to encourage the habit of savings amongst Indians and to deposit these savings with the Govt. at a time when the Indian Govt. didn’t have much reserves of its own.

The Pros

  1. The interest rate offered on PPF Account is 8% and is compounded annually. The scheme is Exempt-Exempt-Exempt (EEE), i.e., the principal invested, interest earned and maturity amount are all tax free.
  2. The investment can be claimed as deduction under Section 80C of the Income Tax Act making it more lucrative.
  3. The PPF Account can be opened with a minimum of Rs 100, with the minimum deposit being Rs. 500 p.a.
  4. It has a maturity period of 15 years and can be extended for a period of 5 years.

The Cons

  1. The maximum deposit is limited to Rs. 70,000/ year.
  2. The loan against PPF is restricted to 25% of the balance in your account at the end of the 2nd year immediately preceding the year in which the loan is applied for.
  3. The number of instalments is also restricted to 12 per year.
  4. Interest is always calculated on the 5th and the last day of the month.
  5. Premature Closure is possible only in case of Death.

Tips while investing in PPF

By depositing money in your PPF Account between the 1st and the 5th of the month, you can earn interest for that month as well. In case you want to use this Investment to avail loans, interest on Loans against PPF account is charged at 2% above the PPF Rate, which works out to 10%. This is very low as compared to the Interest Rates on Personal Loans offered by Banks.

Corporate Fixed Deposits

The Interest offered on Corporate Fixed Deposits are more than the returns offered on Bank Fixed Deposits as they are more riskier than Bank Fixed Deposits and usually they offer 1-2% extra interest as compared to Bank Fixed Deposits.

The following points should be kept in mind while investing in Corporate Fixed Deposits:-

  1. Company Financials – Companies that pay regular dividends and have a healthy debt-to-asset ratio should be considered. Also avoid loss making firms
  2. Ratings: – Always invest in company deposits that have ratings of AA or higher. And keep a track of the deposits during the deposit period as ratings are reviewed and revised on a continuous basis.
  3. Choose Wisely: – Financial agents often push company deposits as they get a higher commission for selling company deposits. Don’t invest on their insistence and prefer to do your own research while investing in Corporate Fixed Deposits
  4. Premature Closure:- Unlike Bank Fixed Deposits wherein the facility of Premature Withdrawal is available, many Companies don’t extent the facility of Premature Closure and it is highly advisable to check the Prospectus for the terms and conditions related to Premature Closure of the Deposit
  5. Prefer to invest in short term deposits: – As Corporate Fixed Deposits are slightly risky, it is always advisable to invest for a shorter duration like 3 to 5 years. Investing for larger periods like 10 to 15 years is not advisable as you never know what the condition of the company would be after such a long period

Senior Citizens Saving Scheme

If you are a senior citizen above the age of 60 years, you can also invest in the Senior Citizens Saving Scheme. For those who have taken voluntary retirement, the age eligibility is 55 years. However, if you have retired from armed forces, there is no age restriction.

The Pros

  1. The minimum investment is a reasonable Rs. 1000 and you can make additional investments in multiples of Rs. 1000. The maximum investment limit is fixed at Rs. 15 Lakhs.
  2. The current interest rate offered is 9% which is more than the interest offered on post office schemes. It has a maturity period of 5 years but can be extended by another 3 years.
  3. Interest Payout is done on a quarterly basis.
  4. Premature Withdrawal is also possible after the completion of 1 year but you’ve to pay a penalty for the same. For withdrawal after 2 years, the penalty is 1% and for withdrawals before the completion of 2 years – the penalty is 1.5%
  5. Investments in this account are also eligible for deductions u/s 80C up to the specified limits of Rs 1 Lakh p.a.

The Cons

  1. Interest Income from this source is taxable and if the interest receivable during the year exceeds Rs. 10,000, TDS would also be deducted on the same
  2. Those who have taken voluntary retirement and are between the age of 55 and 60 years can only invest the retirement benefits.

Personal Advice

Debt Instruments have always been a useful tool to boost up your portfolio, provided you examine each instrument carefully on its merits and demerits, and invest accordingly.

While investing in Fixed Income Plans, an investor should always keep in mind that the promise of high returns by any instrument is not necessarily the best reason to be investing in it. Other factors like Tax benefits, Option for Premature Withdrawal, and Riskiness of the Investment should also be considered while making any investment.

As a thumb rule, also try to diversify your investments as this will not only help you reap benefits of all options available but will also minimise the risks associated with each option.

Happy Investing 🙂

This Article has been authored by CA Karan Batra, who is a finance and tax blogger who blogs on www.charteredclub.com

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25 Comments

  1. Fixed income securities should be a part of your portfolio. Percentage of it depends on the age factor and current income and savings level of the investor. Good article Mr. Karan!!!

    • I agree with you. An efficient portfolio should always contain an element of Fixed Income Securities depending on the age and the risk which the Investor is willing to take.

      The higher the age – the higher should be the component of Fixed Income Securities as the risk factor associated with these form of securities is almost NIL

      And thnx for the appreciation 🙂

    • @Amit
      Sum assured should be on basis of multiple things like age, annual income, any liabilities (home/car loan etc), number of dependents, future expected expenses (child education, marriage etc), future expected increase in income and monthly expenses.
      Considering only your annual income and child/wife dependency, you should take insurance with minimum 50 lac sum assured.

  3. Hi Pankaj,

    My father retired recently from a govt job and thus wants to invest the savings of his total service in some good scheme. He is planning for Post office savings scheme or Senior Citizens Saving Scheme in sbi as he wants to have a fixed monthly income from that amount. So, which one is better among these? And are there any better schemes available?

    • The Interest offered on Senior Citizens Saving Schemes is more than Other fixed Income Options. As your father is eligible for investing in Senior Citizen Saving Scheme, you should invest a large chunk of your investment in this scheme and allot funds to other Fixed Income options as well depending on your fund requirements….

      • @Nitin
        Adding to Karan’s suggestions:
        As of now, fixed deposit interest is high in all the banks and you may also consider opening fixed deposits with bank. You may easily find more than 10% rate of interest for senior citizens in most banks. For longer period like five years, interest rate is around 9.5%.
        As interest in fixed deposit at this point is more than Senior citizen savings scheme, it seems to be better option considering premature withdrawal benefits too.

        Interest from SCSS (Senior citizen savings scheme) is also taxable like fixed deposits, but amount is locked for five years. As of now SCSS offers 9% rate of interest. Max investment limit in SCSS is 15 lakh and it also provide tax benefit under 80-C.

        If tax savings requirements are there, I would advise you to choose a tax saver fixed deposit, which has lock-in for five years and at this point giving around 9.25% rate of interest for senior citizens.

        Fixed maturity plans (FMP) mutual funds can also be considered as they have better in taxation than fixed deposits.

        • While investing in any Fixed Income Option, always check if their is any lock-in period or not as most of the banks who are offering high interest rates have a fixed lock-in period.

  5. I am a senior citizen age 65 yr.
    i want to put 3 lac in FD ,axis bank is giving 10.25 % return for senior citizen on FD
    i m having pension income of 1.2 lac per yr
    As mentioned in FD for senior citizen tht an interest above 10000 is taxable. So do i ve to pay IT on returns from FD of 3 lac
    Wil it get deducted at source or can i get IT exempted by declaring/showing my total income of the yr which is still below taxable limit for senior citizen

    kindly advice

    • @Kshitiz
      As your total income in year is below taxable limits, you can submit form 15-H to bank, to avoid tax deduction by bank.

      • Thanks a lot Pankaj,

        From whr wil i get this form 15 H.
        How do declare my pension income ( from Office or from Pension account in bank whr my pension is comin)

        Kindly Advice

        Regards

        • @Kshitiz
          You can get form 15H from bank itself.
          There is no need to provide pension income proof to bank. No document needs to be attached with 15H. Just plain declaration that your income is below taxable limits with signature would be enough.

  6. my ppf a/c in sbi bank. i want change the bank or port to post office. how can it possible?

    • @Ashwini
      Its possible to get PPF account transferred from one bank to another or to post office.
      Visit SBI bank where you hold your PPF account and ask them for a PPF transfer form.

  7. I am having SCSS a/c with S.B.I. in maharashtra branch but i want to transfer the a/c at uttar pradesh branch at AGRA. Bank is not allowing why.

    • @Kishan
      An SCSS account can be transferred from one deposit office to another. A depositor may apply in Form G, enclosing the Pass Book thereto, for transfer of his account from one deposit office to another. If the deposit amount is rupees one lakh or above, a transfer fee of rupees five per lakh of deposit for the first transfer and rupees ten per lakh of deposit for the second and subsequent transfers shall be payable. [Rule 11 and GOI Notification GSR.(E) dated March 23, 2006)

      Check details on this page: http://www.rbi.org.in/scripts/FAQView.aspx?Id=62

      • TO
        MR PANKAJ BATRA

        THANK YOU VERY MUCH FOR THIS VALUABLE REPLY.

  8. Hi Pankaj, I have heard of Shriram Transport NCD launched recently. How good is this option for fixed incomes perspective? What things we need to check or consider before investing in NCD?

    Thanks !!

    • @Divya
      Shriram Transport NCD is offering good return (upto 11.40%). Minimum investment amount is also small (Rs 10000).
      From liquidity perspective also these are good as these are going to list on NSE and BSE both.
      Company won’t be deducting any TDS on returns as its a listed NCD, but returns would be taxable as per income tax slab rates.
      Regarding safety, Shriram is a stable company and its CRISIL and CARE ratings have also been good. So you can go ahead and invest in these.

  9. Thanks; Mr. Batra ji : My 90% problem is solved by answers of the questions I am going for Senior Citizens saving scheme and depositing the amount where I can get regular income to meet my day to day expences and deduction under section 80C of Income Tax. But I want to deposit only the amount upto 100000/ every year. Can I get rebate every year and have I to open new account every year for depositing in this scheme till it reaches its highest limit, multiple accounts are permitted or not?

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