Savings scheme

Savings scheme for seniors I Options for seniors as FDs lose their luster with negative real interest rate

Options for Seniors as FD Loses its Luster with Negative Real Interest Rate | Photo credit: Thinkstock

In an age when interest rates on fixed income assets are at historically low levels, investors, especially those who depend on interest income, are being left behind. On top of that, rising inflation levels reduce the meager returns on term deposits etc.

Real interest rates have turned negative, affecting the demographic population that depends most on these investments, namely the elderly. The real interest rate is the difference between inflation and interest rates. While interest rates remain at 5%, the consumer inflation rate has consistently exceeded 5% in recent months.

The central government recently reversed its decision to cut interest rates on small savings plans after huge fury. However, the Savings Plan for Seniors (SCSS) offers an interest rate of 7.4%, which is higher than the rates offered by banks to seniors on term deposits.

The State Bank of India (SBI) offers an interest rate of 6.2% on FDs. The state bank extended the offer until June 30. It is currently the best FD product offered by all lenders.

Experts believe that although the government has reversed its decision to cut interest rates on small savings plans, it could come back in the future. So, investors who have excess funds and are ok with the lock-in period can watch SCSS right now. The interest rate will also drop if the government introduces cuts in the future.

It’s worth noting that interest rates on small savings plans are reviewed quarterly, but so investors can avoid the same if they invest now and lock in rates for the duration of the investment. Potential rate cuts will have no impact on plans already invested.

Experts say SCSS is one of the very few options for those who rely solely on interest income. The maximum investment amount that a senior can invest in SCSS is Rs 15 lakh and the investment amount will be eligible for tax deduction under Article 80C. However, like the FD, investments under the SCSS are fully taxable depending on the slab.

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