Mr Prakash Jha retired last year. A senior editor, he currently works at a publishing house on part-time basis and earns a monthly income of Rs 20,000. He has set up some recurring and fixed deposits. And as part of his retirement corpus, he received around Rs 15 lakh.
And we advised him on avenues that he could park his life-long and monthly savings.
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Senior Citizens Savings Scheme (SCSS)
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Mr Jha’s sons support him and his wife for some of the expenses. So, he did not have to worry much about liquidity needs. He could put away some portion of his retirement corpus to SCSS and earn interest on this investment.
The Senior Citizens Savings Scheme offers regular income, highest level of safety, and tax saving for those over 60 years of age.
You can open the account with cash of not more than Rs 1 lakh and by cheque only for Rs 1 lakh and above as per the Senior Citizen Scheme rules on the Income Tax website.
Rate of interest on SCSS as on March 31, 2018 is 8.3% pa.
This interest rate is reviewed by the Ministry of Finance every quarter. Unlike Fixed deposits, the SCSS does not offer ‘cumulative interest’ — where you can earn interest on interest.
Further, the investment amount of upto Rs 1.5 lakh is eligible for tax rebate under Section 80C.
As far as withdrawal is concerned, your deposit is locked in for 5 years. And premature withdrawal is permitted after 1 year of opening the account. However, this will incur some charges.
(Read: All You Need to know about Senior Citizen Savings Scheme)
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Recurring Deposit (RD)
One of the most preferred avenues for the longest time has been the recurring deposits. Here you deposit a fixed amount regularly, say monthly, and earn a fixed rate of interest on your deposits.
Bank RDs are a type of term deposit where the investor makes regular and fixed investments every month and earns a rate of return which is similar to those offered by Bank FDs, for a specified period of time.
The interest earned on RDs is taxed as per one’s income tax slab on accrual basis, but there is no tax deduction at source.
It is safe as the rate of interest is fixed over the tenure. And it gives the flexibility to deposit amount as low as Rs 500.
So, like Mr Jha, you too can set up a RD save some amount of your cash flow every month.
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Bank Fixed Deposit (FD)
Another secure place to park your monthly savings is Bank Fixed Deposits. It is the simplest and the easiest with minimum or no documentation required.
Besides the SCSS, you can allocate some of your savings to bank FD. The biggest advantage of FD is liquidity. Though the interest rates may be comparatively lower, remember that to meet your liquidity needs, you must allocate a portion towards a bank FD.
Bank FDs are term deposits where the investor makes a lump sum investment and earns a higher rate of return compared to a savings account, for a specified period of time. At present, the rate of interest on a 1-year bank FDs ranges from 6.50% to 7.25% per annum.
If the interest amount exceeds Rs 10,000, the bank would deduct tax at source (TDS) at the rate of 10% p.a.
(Read More on: Tax Planning)
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Kisan Vikas Patra (KVP)
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Kisan Vikas Patra is one of the oldest small savings instrument offered by the Post Office of India. In 2014, KVP was re-launched with some amendments.
You can invest in a KVP scheme either jointly, individually, or in the name of a minor. The principal amount invested in KVP will be doubled in a time of 8.7 years. So effectively if Mr Jha invests Rs 1 lakh in KVP, at the end of the tenure of 8.7 years he will receive Rs 2 lakh.
Currently, the interest rate of KVP is 7.8%.
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Liquid and Ultra Short Term Funds
Liquid funds are open-ended mutual funds that primarily invest in money market instruments like Certificate of Deposits (CDs), Commercial Papers, term deposits, and treasury bills, where the maturity of debt papers is upto 91 days.
They are highly liquid and carry very low risk. Moreover, they do not carry any exit loads and withdrawals can be processed within 24 hours on a business day.
Hence, liquid funds are suitable to manage short-term liquidity needs — say when one has an investment horizon of less than three months.
(Read: Arbitrage Funds vs. Liquid Funds vs. Savings Bank A/C: How to Park Your Short-Term Funds)
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Savings Account
Well, this is an age-old and the easiest way to park short-term needs, and even keep aside some money to manage contingencies. You earn around 4%-6% p.a. interest, depending on the bank you opt for to park your savings.
But if you wish to counter inflation (which erodes the purchasing power of your hard-earned money) while managing your short-term liquidity, you can't be parking too much surplus in a saving bank account. It will prove to be imprudent.
You can create a contingency or emergency fund by putting aside 6-12 months of your expenses to build this fund.
Like Mr Jha, if you are unsure about the safe avenues, connect with us and we will be happy to help you.
Besides, I would like to share something. As a child, I have seen my mother stack money in the weirdest places of the world. Each purse/wallet/pouch she had was a safe place to store money. And when there was a financial need in the family, her monthly savings would turn out to be a blessing in disguise. Though I found her saving habits weird, it always helped during an emergency.
I am sure you too might have your own way of stacking your monthly savings saving.
Write us your savings style.