Five ways to generate passive income after retirement

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After a lifetime of working hard, most people hope to enjoy some time in their retirement “golden years” to travel and have time to enjoy life. It is therefore advisable to invest your retirement benefits in avenues that offer you assured as well as the highest returns so that you do not compromise on living standards even after retirement. Here are five best investment avenues that senior citizens can consider for creating a regular flow of income:

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

It is a retirement scheme, which pays out a pension at the assured rate of return. The scheme is designed specifically for senior citizens who are above the age of 60 years and is for a fixed period of 10 years. One can invest a maximum of up to Rs 15 lakh in the policy.

-Interest: The pension policy currently offers an assured return of 7.4%. On the minimum investment of Rs 1.62 lakh, it offers a monthly pension of Rs 1,000. Similarly, on the maximum purchase price of Rs 15 lakh, it offers a monthly pension of Rs 9,250. The frequency- monthly, quarterly, or yearly- of pension amount can be chosen at your convenience.

-Tax: The pension received is clubbed with your total income and taxed as per your income tax slab.

-How to buy? LIC has been offering this pension scheme since May 4, 2017, it has now been extended further till March 31, 2023. You can buy the policy both online and offline.

Senior Citizen Savings Scheme (SCSS)

This is a retirement scheme and is backed by the government of India. It offers a regular stream of income with high return and tax benefits. One can deposit a maximum amount up to Rs 15 lakh and is specifically for people above 60 years of age. The lock-in period is 5 years. However, one can extend the maturity duration for 3 years.

-Interest rate: Currently, the SCSS offers an interest rate of 7.4%. Quarterly interests are paid in the month of April, July, October, and January.

-Tax: Individuals are eligible for tax deductions up to Rs.1.5 lakh under Section 80C of the Income Tax Act, 1961. If the interest generated is more than Rs.10,000 p.a., the tax gets deducted at source.

-How to buy: Visit the nearest post office or bank branch. along with the KYC documents and a cheque for opening the account. Many banks offer the facility online as well.

Debt funds (SWP)

Mutual funds also offer an opportunity to senior citizens for regular income by opting for SWP (systematic withdrawal plan). Through SWP facility senior citizens can withdraw regular income in a tax-efficient manner compared with FDs.

-Return: Debt funds especially liquid and ultra-short duration funds are considered to be suitable for senior citizens seeking liquidity for emergency situations. The important point to note is that they do not give a guaranteed return. Over the last year, they have given an average return of 4-6%.

-Tax: They are very tax efficient as you pay tax only on gain and not on the whole amount withdrawn. Suppose you invest Rs10 lakh in a 5% FD.  Assuming you fall in the highest tax bracket, you would need to pay a tax of about Rs15,000 on the interest amount of Rs 50,000. Now, if instead of FD you start an SWP, then your tax bill would get reduced, considerably. Assuming returns are the same and you withdraw Rs 50,000 every year from the debt fund, you would have to pay taxes on the capital gain part only which would be Rs2,500 (Rs50000-52,500). The tax amount would work out to only Rs 750.

-How to apply: You can buy it online or offline through the help of an agent or an advisor.

Floating Rate Bonds

Unlike regular bonds that pay a fixed interest rate, Floating Rate Savings Bonds, 2020, has a variable rate of interest. These bonds are issued by the government of India and are considered safe. It comes with a lock-in period of seven years with a special provision for premature redemption for senior citizens. Unlike other options, the scheme is open to all and there is no upper investment limit on these bonds.

-Interest rate: The rate is fixed at 7.15%, which is payable at half-yearly intervals on January 1 and July 1 every year.

-Taxability: Return from your investments is added to your income and taxed as per your tax slab.

-How to apply: The bonds can be purchased from designated bank branches. The bonds are held in a dematerialized format in Bond Ledger Accounts.

Bank/Company deposits

Bank FDs are offered by banks whereas corporate FDs are offered by companies. One of the benefits of corporate FDs is that they provide higher interest rates than bank FDs.

-Interest rate: Bank FD gives an annual return of 5-6%. Corporate deposits give a higher return than bank deposits of 6-8%. The investor should understand that they give higher returns only because they are risky.  One should invest in AAA-rated corporate FDs only. Do not look for lower-rated FDs to get higher returns

-Taxability: Interest earned from deposits is taxable as ‘Income from Other Sources’ and are taxed according to your slab rate.

-How to apply: You can buy them online as well as offline through your bank or advisor.

The above-mentioned options can help you earn passive income during the most relaxed years of your life. Create a portfolio so that your regular income does not stop even in your golden year.