If you have just retired and are looking to deploy the retirement money, the simplest option may seem like bank fixed deposits.
However, you may miss out on other superior options available to build a diversified retirement income portfolio that also returns well.
Here is a low down on your options and the suitability of each such option, based on your tax slab.
Post Office Senior Citizens’ scheme
At 8.6% per annum (from April 1, 2016, but subject to reset every quarter), this is the best rate that a 60-plus investor can get in the present scenario.
This rate will be fixed for five years – that is until maturity – even as new rates (linked to government security yields in the market) will be announced every quarter. This is an ideal option for multiple reasons:
One, the post office interest rate will likely remain higher than bank interest rates.
Two, the quarterly interest payout gives you the needed income flow.
Three, it is eligible for deduction under Section 80C of the Income Tax Act, in case you fall under tax bracket and want to avail deduction. In fact, in the year of your retirement, when you still remain in the high tax bracket, this can be an ideal 80C investment option.
Four, in later years, although the interest is fully taxable, given that you will fall under lower tax brackets, than in your earning years, the post-tax returns won’t be terrible.
Five and very importantly, it is sovereign guaranteed. Remember, even bank deposits (and your savings account together) carry insurance and only up to Rs 1 lakh. The only drawback is that there is limit of Rs 15 lakh that you can invest (across all accounts, individually or jointly) at any point. Besides, TDS will be deducted for all interest payouts exceeding Rs 10,000 a year (similar to bank). Hence, make sure Form 15H is submitted if you are below the taxable limit for senior citizens.
It is suitable for all retired investors across tax brackets. It remains an ideal investment option in the year of retirement, especially to avail Section 80C tax benefit.
Bank fixed deposits (FDs)
If not for anything else, the relationship that you have with your bank and the services that you will avail there, especially as a senior citizen, will entail that you park some money in bank deposits. While you will enjoy special rates for senior Citizens, this is certainly not the best time to lock a majority of your funds in banks. The interest is taxable at your slab rate. Here again, submit your Form 15H to avoid TDS if you are not within the taxable limit.
Bank FDs are a good option to diversify. They are better if you are not a tax payer. If you are one, ensure you keep your exposure to this avenue limited in a low interest rate scenario such as the present one.
Corporate fixed deposits
Do not scout for high returns in this space. Go for two to three well-known NBFCs, which are also governed by RBI to ensure you park your money in safe avenues. As the interest rate is likely to be higher than bank FDs, this is a must have for diversification purposes. While interest rates have fallen in this segment as well, they still remain higher than bank deposit rates.
Good diversification option for investors who are not in the tax ambit and are in the low tax bracket. For those in the high tax bracket, the post tax returns will not keep pace with cost of living, especially medical expenses.