Investment
Investment

There are many situations when we hunt for regular incomethis can be very true for people once retirement without any pension. Also, there would be new entrepreneurs World Health Organization would like regular income till their start-up stabilizes. we tell you seven investments which may generate regular income for you along with their pros and cons.

 

1. Post office Monthly income scheme (POMIS)

As the name suggests this can be mounted deposit in Post office on that you get regular monthly interest payment. The investment tenure is for five years solely.

Expected Return: seven.7% (revised by Government of India each quarter)

The Good:

  1. As just in case of banks, there’s no credit risk as Post offices are Government owned.
  2. The financial gain is secure.
  3. There is no TDS subtracted on the interest paid.


The Bad:

  1. The investment tenure is restricted to five years. when maturity you’ll invest once more however at prevailing interest rates resulting in reinvestment risk.
  2. Though no TDS is subtracted, the interest attained is taxable per the taxation block of the person.
  3. Investing in Post office schemes isn’t convenient. you would like to go to Post office to invest and to withdraw on maturity. this could be tough for aged and also for those that change address often.
  4. Penalty on the closure of account before maturity.

 

2. Bank Fixed Deposit

This is the most popular investment avenue for regular cash flows. You can choose to get the interest credited in your savings account every month, quarter or annually.

Expected Returns: 6% to 8% for General Public and 6.5% to 8.5% for Senior Citizens. This keeps on changing with interest rate cycle.

The Good:

  1. It’s convenient to invest and in most cases can be handled online.
  2. The credit risk is very low especially in case of Government-owned banks and large Private Banks. However, investors should be careful about cooperative banks.
  3. The income is guaranteed.

The Bad:

  1. The interest earned is taxable according to the income tax slab of the person
  2. TDS (Tax deduction at source) is deducted by banks in case the annual interest income exceeds Rs 10,000. This is especially painful for people who do not have income in taxable range. However eligible individuals can submit Form 15G/H prevent TDS deduction.
  3. Reinvestment Risk – For most banks, the maximum tenure of bank fixed deposit is 10 years. So after 10 years, you cannot be sure of interest rates offered. It may be much lower than what you were actually getting.
  4. There may be a penalty on the closure of account before maturity.

 

3. Senior Citizen Saving Scheme (SCSS)

SCSS is again a popular investment option for senior citizens. The interest is paid out Quarterly in the bank account.

Expected Return: 8.5% (revised by Government of India every quarter)

The Good:

  1. There is no credit risk as the deposit is guaranteed by Government of India.
  2. The interest rate offered is higher than most banks.
  3. The investment up to Rs 1.5 lakhs in SCSS is eligible for tax deduction u/s 80C.
  4. The income is guaranteed.

The Bad:

  1. The interest earned is taxable according to the income tax slab of the person.
  2. SCSS matures in 5 years. After maturity, you can invest again but at prevailing interest rates. So it has reinvestment risk.
  3. The maximum investment is limited to Rs 15 Lakhs.
  4. TDS is deducted @ 10% of interest paid in case the annual interest is more than Rs 10,000 in a financial year
  5. Penalty on the closure of account before maturity.

Useful Tips:

  • You can open another account in your spouse name if he/she satisfies all other criteria.
  • SCSS can be opened in approved banks or post office. You should prefer banks as you can have an online facility and can handle account from different places.

4. Tax-Free Bonds

Tax-Free Bonds are a good source of regular income for people in the higher tax bracket. As the name suggests the interest received is tax-free. However, selling bonds before maturity leads to Capital gains tax. These bonds can be bought in secondary markets through a Demat account or when companies open bonds for initial subscription.

Expected Return: 6.00% – 6.50% (Tax Free)

The Good:

  1. The interest paid is tax-free, so it’s good for people in higher tax brackets
  2. The income is guaranteed.
  3. The tenure of these bonds is up to 20 years, so reinvestment risk is reduced to an extent.
  4. Tax-Free bonds are issued by big PSUs and have a high credit rating, so have negligible credit default risk.
  5. If you have a Demat account, investment and selling can be done online.

The Bad:

  1. Most bonds have only annual payout option. This can be difficult for people who need monthly payouts.

Useful Tips:

  • Some companies offer Tax-Free Bonds subscription in physical form too.
  • Selling tax-Free Bonds before maturity leads to Capital Gains and is taxed accordingly.

5. Government Securities/Bonds (G-Secs)

G-Secs are government bonds issued by RBI on behalf of Government of India. These bonds havea tenure of up to 30 years and have no Credit risk. They pay interest every 6 months.

Expected Return: 6.5% – 7% (depending on tenure) changes with interest rate cycle

The Good:

  1. No Credit risk
  2. Long investment tenure of up to 30 years, hence minimal reinvestment risk
  3. Investment can be done online through a Demat account or IDBI Samriddhi G-Sec portal
  4. Liquid – Can be easily sold
  5. No TDS on interest earned on G-Secs
  6. Income is guaranteed

The Bad:

  1. The interest earned is taxable according to the income tax slab of the person
  2. The price of G-Secs fluctuates with a change in interest rate regime. But if you hold till maturity it does not matter.

6. Rent from Real Estate:

Rental income from real estate is another popular option.

Expected Return: 1% to 4% rental yield for residential property and 5% to 12% for commercial property.

The Good:

  1. The rental return generally goes up with inflation.
  2. 30% standard deduction along with actual incurred expenses can be deducted from income for computation of income tax.

The Bad:

  1. The initial investment is large.
  2. Difficult to sell off at the right price in case of emergency.
  3. Need to be involved in the regular maintenance of the property.
  4. Income is not guaranteed as the property may remain vacant for a longer period of time.

 

7. Systematic Withdrawal Plan in Debt/Arbitrage Mutual Funds

Systematic Withdrawal Plan in Debt funds can be efficiently used to generate regular income. These funds have returns similar to Bank FDs but are tax efficient in case the SWP is planned for more than 3 years. Arbitrage Funds can also be used in place of Debt Funds. The advantage of Arbitrage is the returns are tax-free after one year.

Expected Return: Similar to Bank Fixed Deposit

The Good:

  1. The returns are more tax efficient than fixed deposits, so more suited for people in the higher tax bracket.
  2. It’s easy to manage. Everything can be handled online.

The Bad:

  1. There is a risk of capital running out in case the performance is lower than expected or if there is need to extend the regular income duration.

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