Tag: Government Securities

Post Office Monthly Income Scheme (POMIS) – How it works and Rules

Posted on by Jagoinvestor

Are you looking for a safe option to invest your money and earn decent returns? If yes, then I can explore one of the post office schemes. Today, we look at post office monthly income schemes (POMIS) which are not that well-known among urban investors. We often look to fixed deposits and other debt options to park our money or generated monthly income. But the monthly income scheme post office offers myriad possibilities. Let’s explore!

Post Office Monthly Income Account

Post Office Monthly Income Scheme is one of the post office schemes which gives you a guaranteed return on your investment. Anyone who wants to generate a monthly income can open this account and get an assured monthly income. You get an 8% interest per year, which is payable on a per month basis. You will get the interest each month from the date of making the investment, not from the start of the month.

For example Ajay invests Rs 4.5 lacs in the post office monthly income scheme. His interest per year is Rs 36,000 @8%, hence he gets Rs 3,000 per month as income. If you do not withdraw the amount for some month, it would not earn any interest and just lie in the account.

This post office saving scheme does not come under sec 80C so there is no tax-exemption for the amount you invest in this, and interest income is taxable, but there is no TDS cut in this scheme. Read 7 Tax saving Tips

You can deposit the money in the POMIS with cash, demand draft or local cheque. Once you open a monthly income scheme account, you will be issued a scheme certificate and a passbook to record the transactions against the post office MIS scheme.  The maturity period of this scheme is 6 years. You will also be eligible for a 5% bonus if you retain your scheme foe 6 years, so eventually, your overall return including this bonus can turn out to be around 8.9 %.  There is a limit on the amount you can invest in POMIS. It’s limited to Rs 4.5 lacs for a single account and 9 lacs for a joint account. You can have any number of accounts, but within the overall upper limit.  There is no compulsion to take your money out after maturity, you can leave the money in the account, but then it would earn the interest equal to saving bank account for the next 2 years only.

Getting Interest income in your Saving account

You get to withdraw the POMIS income amount by directly going to the Post-office. However, there seems to be a bit of confusion,  if you want the income in your savings bank account. According to per some resources, you can get it credited to your savings bank account,  provided it’s in the same post-office. But elsewhere, some guys confirm that you can provide ECS information at the time of opening the account and get the interest amount created in your Bank account (see the list of cities covered by Post-office). I found the comment below on this website, where a user claims of using ECS.

YES! you can opt for a ECS facility whereby your monthly interest amount will be credited to any savings account of your choice (here HDFC). After you open the POMIS account, you need to fill up the ECS form, attach a blank cheque of your HDFC savings account and you’re all set. You don’t need to open a Savings account at the Post office just for credit of monthly interest.

The information I’ve given here is authentic, because I’m personally using the ECS facility.

Pre-mature Withdrawal from Post-Office monthly Saving Scheme

Even though the maturity period for POMIS is 6 yrs , there is a facility to break it and take your money out. However you can take your money only after 1 year. You have to pay some penalty which is as follows

  • If you break it within 1-3 yrs: 2% penalty on Deposit amount
  • If you break it after 3 yrs: 1% penalty on Deposit amount

Example: If you deposit Rs 1 lac in  POMIS , and want to take money out in 2nd year,  you will have to bear the penalty of 2,000 and you will get back 98,000. If you take money out in 5th year, you get 99,000.

Confusion of returns by mixing POMIS along with RD?

There are some claims which say one can invest the monthly income coming from Post office monthly income scheme into the Post office RD and earn a return of 10.5 %. This at first looks amazing, but its kind of untrue and marketing gimmick. I did a XIRR analysis of the whole cash flows and found out that considering everything , your final and actual return is just 8.77% , which means that when you invest your money in POMIS , direct all the monthly income to an RD and at the end when you get the maturity amount along with the bonus of 5 %, in total you have made an annual return of just 8.77%, which is quite ok considering the safety and conservativeness of the product. But considering the tax to be paid at the end of the tenure, again you might not get great Real Returns! , Remember that the RD comes for the 5 yrs, but it can be extended for 1 more year and it can be made for 6 yrs.

Returns from POMIS + RD

However, the Post office website claims that you earn 10.5% when you put your monthly income into an RD, which is just to attract investors and not give a complete picture. This 10.5% figure is actually only after considering the bonus amount you get at the end, If you remove the Bonus of 5% from the scene , then the return drops to 7.92% . In the below example, you can see that a person who has invested Rs 1,20,000 will get Rs 800 as monthly income , and he gets 72808 as maturity amount from RD, 1,20,000 back as the initial investment and 6,000 as bonus amount .

Scene 1 : If you consider the 800 payment per month in RD for 6 yrs and the maturity amount of 72,806 at the end of 6 yrs , then the returns are just 7.92% (XIRR)

Scene 2 : If you consider scene 1 along with the Bonus amount also , which means you get 72,806 + 6,000 Bonus also = Rs 78,806 , in that case your returns are 10.32% , but its misleading as this bonus is the cost of your 1,20,000 getting stuck at one place for 6 yrs and not an RD feature . So this is not the right way of looking at it . (See chart above)

In case of scene 2 into consideration , then the return from “Only POMIS” is just 8% , but if you consider POMIS + Bonus only then its 8.91% .

Note that this setup operates automatically, you have to set up this once and then no more overseeing. It will happen automatically each month (official link)

Other Features of Post Office Monthly Income Scheme

  • A minor above age 10 years can open an account on his/her own name directly. There is a limit of 3 lacs for guardian and it would not be clubbed with guardian limit (More on Clubbing rules)
  • Non-Resident Indian / HUF cannot open the Account.
  • Interest not withdrawn does not carry any interest.
  • Your POMIS account can be transferred  from one post office to any Post office in India free of cost.
  • The amount deposited in POMIS is exempt from Wealth Tax

Nomination

You have to make the nomination for your Post office monthly Income scheme at the time of applying, however, if you don’t do it at the time of opening, you can also do the nomination later. Incase of the death of the account holder the money will be paid to the nominee.  Read more on nomination here.

What Are RBI Relief Bonds?

Posted on by Jagoinvestor

In this article we will talk about RBI relief Bonds. Some bonds have a special provision that allows the investor to save on tax. These are termed as Tax-Saving Bonds, and are widely used by individual investors as a tax-saving tool. Examples of such bonds are:

  • Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
  • Capital Gains Bonds under Section 54EC of the Income Tax Act, 1961
  • RBI Tax Relief Bonds

Are you a new Reader ? See all the articles by Categories

RBI Relief Bonds

What Are RBI Relief Bonds?

RBI Relief Bonds are instruments that are issued by the RBI, and currently carry an 8.5 per cent rate of interest, which was reduced from 9 per cent early this year. The interest is compounded half-yearly. Maturity period of RBI Bonds is five years, and interest received is tax-free in the hands of the investor.

INVESTMENT OBJECTIVES

How Suitable Are RBI Relief Bonds For An Increase In My Investment?

RBI Bonds are not very suitable if you are looking for an increase on your investment. Since RBI Bonds carry interest @ 8.5 per cent, capital appreciation is better in other safe instruments that offer a higher rate of return.

However, if safety is of paramount importance to you, you couldn’t ask for a better deal as this is the safest instrument to invest in. In case of the cumulative option, bonds issued at a face value of Rs 1,000 are redeemed at Rs 1,516.

Are RBI Relief Bonds Suitable For Regular Income?

Yes, you can opt to receive interest either on a half-yearly basis or on maturity of the instrument, along with the principal invested.

If you opt for the first option, i.e., to receive interest on a half-yearly basis, you will receive interest every six months from the date of issue of the bond up to 30th June or 31st December, whichever is earlier. Interest is paid on 1st July and 1st January each year.

To What Extent Do RBI Relief Bonds Protect Me Against Inflation?

RBI bonds do not offer any protection against inflationary pressures. As with other instruments of a similar nature, this risk has to be borne by the investor.

Can I Borrow Against RBI Relief Bonds?

Yes, you can borrow against RBI Bonds by pledging them as security in a bank.

RISK CONSIDERATIONS

How Assured Can I Be Of Getting My Full Investment Back?

RBI Bonds are issued by the country’s central bank, the Reserve Bank Of India. These are among the safest instruments available for investment, and you can be assured of getting back the full amount of your investment.

How Assured Is My Income From RBI Relief Bonds?

Your income from RBI bonds is assured. Since the issuing entity is the country’s central bank, the risk on this investment is nil. In case of the half-yearly interest payment option, the rate of return is 8.5 per cent.

In case of the Cumulative Scheme, where you receive the total interest at the end of the tenure of 5 years, the simple interest works out to 10.32 per cent at the end of the tenure.

Are There Any Risks Unique To RBI Relief Bonds?

No, there are no risks associated with your investment in RBI bonds. This is one of the safest investments you can make. Inflation and fluctuations in interest rates affect investment decisions in RBI Relief Bonds. An increase in the interest rates result in a decrease in bond prices, and vice-versa, if you want to sell them in the secondary market.

Are RBI Relief Bonds rated for their credit quality?

No, since the issuing party is the country’s central bank-the RBI-these bonds are extremely safe, and require no commercial ratings.

BUYING, SELLING, AND HOLDING

How Do I Buy RBI Relief Bonds?

Application forms for RBI Bonds are available and accepted at all branches of the Reserve Bank of India, designated branches of the State Bank of India, and designated branches of nationalised banks across the country.

What Is The Minimum Investment And The Range Of Investment for RBI Relief Bonds?

The minimum investment on RBI Relief Bonds is Rs 1,000. You can apply in multiples of Rs 1,000 thereafter. There is no prescribed upper limit to your investment in this instrument.

What Is The Duration Of RBI Relief Bonds?

The period of holding of RBI Bonds is five years from the date of issue. The bonds are repayable on the expiration of 5 years from the date of their issue.

Can RBI Relief Bonds Be Sold In The Secondary Market?

Yes, the bonds can be sold or transferred to another party. If the bonds are in the form of Bond Ledger Account (BLA), they can be transferred by execution of a Transfer Deed in the prescribed form. However, transfer shall not be deemed as complete until the name of transferee is registered as holder of the Bond in the Office of Issue.

A new BLA will be opened in the name of the transferee (whom the bond has been sold to) for the remaining period by closing the BLA of the transferor (original holder of the bond). The Bond in the form of Promissory Note (PN) will be transferable by endorsement and delivery.

What Is The Liquidity Of RBI Relief Bonds?

While RBI Bonds cannot be redeemed prematurely and must be held for the entire duration of 5 years, you can always exercise the option of selling RBI Bonds in the secondary market if you so desire.

How Is The Market Value Of RBI Relief Bonds Determined?

Market value of RBI Relief Bonds is determined on the basis of prevailing (8.5%) interest rates and market conditions.

What Is The Mode of Holding RBI Relief Bonds?

RBI Relief Bonds can be held at the credit of the holder in an account called BLA or in the form of PN. The bond can be held in demat form, i.e., a certificate of holding will be issued to the holder of bonds in the BLA.

The bonds in the form of BLA are issued and held with the public debt offices of the RBI or any branch of a scheduled bank authorised by the RBI. The bonds in the form of PN are issued only at the offices of RBI. However, bonds issued in one form will not be eligible for conversion into the other.

TAX IMPLICATIONS

Interest received on RBI Relief Bonds is completely exempt from income tax as per the provisions of the Income Tax Act, 1961. RBI Relief Bonds are also exempt from Wealth Tax. However, there is no tax benefit on the amount invested in these bonds.

Hope you liked this article. Leave your views about this article or any query if you have in our comment section.

Understanding what is Fixed Maturity Plan & what are the benefits of FMP?

Posted on by Jagoinvestor

Attaining financial goals is does not happen overnight, it needs a long term investment. But in case of Stock market, lot of people avoid a long term investment because of the fear of volatility of the returns.

Fixed Maturity Plan is the better option for such investors because of its higher security concerns. Let me explain you a bit detail about FMP.

Fixed Maturity Plan (FMP)

What is FMP?

Fixed Maturity Plans are the equivalent of a fixed deposit in a bank, with a little difference. The FMP’s returns are only indicated and not ‘guaranteed’, Since the fund house knows the interest rate that it will earn on its investments, it can provide ‘indicative returns’ to investors.

Fixed Maturity Plans are debt schemes, where the corpus is invested in fixed-income securities.

Where do FMP’s invest?

FMPs usually invest in certificate of deposits (CDs), commercial papers (CPs>), money market instruments, corporate bonds and sometimes even in bank fixed deposits.

Depending on the tenure of the Fixed Maturity Plan, the fund manager invests in a combination of the above-mentioned instruments of similar maturity. Say if the FMP is for a year, then the fund manager invests in paper maturing in one year.

The expense ratio, generally varies from 0.25 to 1 per cent.

Tenure of Fixed Maturity Plan

The tenure can be of different maturities, from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.

These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.

Benefits of Fixed Maturity Plan:

1. Minimal risk – Fixed Maturity Plan’s are hold by fund manager till maturity which helps in getting fixed returns. Because of this FMP’s exposed least to the interest risks.

2. Protection from capital loss – FMPS’s invest in debt funds and this reduces the loss of capital relatively than that of equity funds.

3. Liquidity – Normally it is suggested to hold the Fixed Maturity Plan’s till its maturity, but if you want an exit then you will have that option and can exit from the FMP at any point.

What is the difference between FMP and FD?

FMP are differentiated form FD on the basis of some major key points like interest, returns, tax and indexation. As a debt fund, FMP enjoys the benefit of indexation on a long tern investment for more than 1 year.

FD is a risk free investment tool whereas FMP’s are risky because of the corporate debt default. Besides this, the returns from FD are fixed, but in case of FMP, the returns are only indicative and not fixed.

You can watch this video given below to know more about how FMP’s are different from FD’s.

Actual return Vs Indicated Return

The actual return can vary slightly, if at all, from the indicated return. Against that, a bank fixed deposit exactly prints the amount which is due to you on maturity on the FD receipt. However, FMPs do earn better returns than fixed deposits of similar tenure.

Have a look at the list of closed ended FMP’s , and there returns : https://www.personalfn.com/research-it/mutual-funds/fundarena/SchTypNat.asp

Tax Implication

1. Dividend :

Tax-free in the hands of the individual investor.

2. Investment in growth option of the FMP for less than a year :

The gains are added to the investor’s income and taxed at the investor’s slab rate.

3. Investment in the growth option of the FMP for over a year :

Either 10% capital gains tax without indexation or 20% with indexation.

What is indexation benefit?

The finance minister has been generous enough to recognize that inflation erodes the real value of any investment. So every year, he comes out with an inflation index based on the prevailing rate of inflation.

The cost of investment is indexed by multiplying the index of the year of maturity and divided by the inflation index prevailing on the year of investment. If you have arrived at an indexed cost, then the long-term capital gain is taxed at 22.44 per cent and if you do not opt for the indexed cost, then the tax is 11.22 per cent.

To understand more on indexation, Read this

Conclusion

FMP’s are investment options for sure if you want to park your money for short term. They are more tax efficient and give better post-tax returns. Though returns are not 100% guaranteed , they are almost risk free (remember almost) .

If they really give better than returns then FD’s and practically as safe as FD’s why don’t people invest in these ?

Ans : No awareness among people and they less risk taking attitude

If you have question or any doubt related to FMP, you can leave your query in the comment section.