Every time markets fall, investors start flocking to fixed income options. Though small savings rates have been hiked don’t go overboard when investing in these instruments.
1. PPF: Young investors stay away
Investors love the PPF because the investment gets tax deduction, the interest earned is tax free and there is no tax on maturity. But there is an annual investment limit of Rs 1.5 lakh per year. Young investors (below 35) looking for tax deduction under Sec 80C are advised not to go for the PPF. An equity-oriented investment such as ELSS (or tax saving mutual funds) or NPS is likely to give higher returns.
However, older investors (above 45) should use the PPF to bolster their debt portfolio. Keep in mind, however, that the interest rates are linked to government bond yields and are revised every quarter. The PPF interest rate has been hiked to 8% for the Oct-Dec 2018 quarter.
Some analysts believe the hike was long due because government bond yields (to which the small savings rates are linked) have consistently risen in the past few quarters. But others feel that in the long term, interest rates will dip, bringing down the PPF rate as well.
2. SSY: Better than PPF
If you plan to invest in the PPF or bank deposits for your daughter’s education or marriage, the Sukanya Samriddhi Yojana (SSY) is a better alternative. But an account can be opened only if the girl is below 10. There is an annual investment limit of Rs 1.5 lakh in a financial year.
A parent can open an account for a maximum of two daughters, but the combined investment in the two accounts cannot exceed Rs 1.5 lakh a year. The SSY offers the same tax benefits as the PPF—tax deduction under Sec 80C, tax free interest and no tax on maturity. On top of that, the interest rate is higher at 8.5%. Though this might sound attractive, experts say one should not invest their entire savings in fixed income options.
3. POMIS: Tax inefficient
The Post Office Monthly Income Scheme will earn interest of 7.7% for the December quarter. An investor can open multiple accounts in his name, subject to the upper limit of Rs 4.5 lakh in a single account and Rs 9 lakh in a joint account. The scheme offers liquidity to the investor allowing premature withdrawals after one year, but with a penalty.
Premature withdrawals after one year attract 2% deduction on the deposit and a nominal 1% after three years. But, investor should note that the scheme is highly tax inefficient because the interest earned is fully taxable and does not fetch any rebate under Section 80C. Though it guarantees monthly income, it is not advised as a good savings avenue even for retirees.
4. NSCs: Better than tax saving FD
Interest rate on NSC has been hiked from 7.6% to 8% for the December quarter. The revised rate is at par with some of the highest paying five year bank FDs. But NSC has an edge over tax saving bank FDs and PPF as there is no upper limit on the investment amount and it can be pledged as security to get a loan.
Also, interest rate on NSC in spite of quarterly revisions gets locked for the five year term at the time of investment, unlike in the case of PPF. The interest income from NSC is added to the investor’s income and taxed as per the applicable tax slab.
However, the interest is re-invested every year and the cumulative interest, compounded annually, for the 5-year period is paid out along with the principal at the time of maturity. Hence, interest income for the first four years qualifies for tax deduction within the Rs 1.5 lakh limit under Section 80C.
5. SCSS: Best option for seniors
A 3-5 year bank fixed deposit right now fetches 7.5-8%. Most banks offer senior citizens almost 25-50 basis points higher interest. This year’s budget gave an additional Rs 50,000 exemption to interest income earned by senior citizens, adding to the lustre of fixed deposits.
But the interest rate of the Senior Citizens’ Savings Scheme has been hiked to 8.7% per annum, making it a far better option than bank deposits. What’s more, it gives out quarterly interest, which is a big draw for retirees seeking regular income.
Senior citizens who have not yet hit the Rs 15 lakh investment limit for the scheme should invest immediately and lock in at the high rate. Accounts can be opened in any post office or designated branches of PSU banks.
Courtesy: – ET Wealth Date: – 22 Oct, 2018.
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