There can be several situations when we look for regular income. This is especially true for people after retirement without any pension. Also there would be new entrepreneurs who need regular income until their start-up stabilizes. We tell you 13 investments which can generate regular income for you along with their pros and cons.
1. 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: 7% to 8% for General Public and 7.5% to 8.5% for Senior Citizens. This keeps on changing with interest rate cycle.
The Good:
It’s convenient to invest and in most cases can be handled online.
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.
The income is guaranteed.
The Bad:
The interest earned is taxable according to the income tax slab of the person
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.
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.
There may be penalty on closure of account before maturity.
Useful Tips:
Prefer Government banks or large private banks for FD. Cooperative banks are risky and hence you should limit your exposure in these banks.
In case eligible, submit Form 15G/H to get rid of TDS
2. Post Office Monthly Income Scheme (POMIS)
As the name suggests this is fixed deposit in Post Office on which you get regular monthly interest payment. The investment tenure is for 5 years only.
Expected Return: 8.4% (revised by Government of India on April 1 every year)
The Good:
As in case of banks, there is no credit risk as Post offices are Government owned.
The income is guaranteed.
There is no TDS deducted on the interest paid.
The Bad:
The investment tenure is limited to 5 years. After maturity you can invest again but at prevailing interest rates leading to reinvestment risk.
Though no TDS is deducted, the interest earned is taxable according to the income tax slab of the person.
Investing in Post Office schemes is not convenient. You need to visit Post Office to invest and to withdraw on maturity. This may be difficult for aged and also for people who change address frequently.Penalty on closure of account before maturity.
Penalty on 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: 9.3% (revised by Government of India on April 1 every year)
The Good:
There is no credit risk as the deposit is guaranteed by Government of India.
For FY 2015-16 the interest rate is 9.3% which is higher than most banks.
The investment up to Rs 1.5 lakhs in SCSS is eligible for tax deduction u/s 80C.
The income is guaranteed.
The Bad:
The interest earned is taxable according to the income tax slab of the person.
SCSS matures in 5 years. After maturity you can invest again but at prevailing interest rates. So it has reinvestment risk.
The maximum investment is limited to Rs 15 Lakhs.
TDS is deducted @ 10% of interest paid in case the annual interest is more than Rs 10,000 in a financial year
Penalty on 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 online facility and can handle account from different places.
Also Read: Know all about Senior Citizens’ Savings Scheme
4. Company Fixed Deposit
There are NBFCs and Companies (both Government owned and Private) which offer fixed deposit schemes with monthly/quarterly or annual payment of interest.
Expected Returns: 8% to 9% (additional 0.25% to 0.5% for senior citizens)
The Good:
The interest paid is generally higher than that offered by banks.
The income is guaranteed.
The Bad:
The interest earned is taxable according to the income tax slab of the person
TDS (Tax deduction at source) is deducted by companies 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.
The FD duration is generally 1 to 5 years. Some NBFCs offer tenure of up to 10 years. So there is reinvestment risk in the long run.
You might need to fill forms and do KYC formalities, every time you make an investment. This is not as convenient as bank FDs.
Premature withdrawal can have heavy penalty. Always look for the penalty clause before investing.
Useful Tips:
Prefer Government organizations or high credit rated companies (AAA) as the credit default risk is lower.
Invest only some part of your “regular income generating portfolio” in one company. Diversify across companies.
In case eligible, submit Form 15G/H to get rid of TDS.
Also Read: List of Company Fixed Deposits
5. Company Bonds (NCDs):
Companies offer NCDs (commonly known as bonds) from time to time. NCDs pay fixed interest rates known as coupon. You can buy NCDs directly from NSE/BSE using your Demat account or apply for them whenever they are issued by companies. These NCDs pay interest directly in your bank account and it can be monthly/quarterly or annual.
Expected Returns: 8% to 11% (depending on credit rating)
The Good:
The interest paid is higher than that offered by banks.
The income is guaranteed.
If you have Demat account, investment and selling can be done online.
No TDS is deducted if the investment is done in demat form.
The Bad:
The interest earned is taxable according to the income tax slab of the person
The NCD duration is generally 3 to 8 years. So there is reinvestment risk in the long run.
Though NCDs are listed on stock exchange and can be sold anytime but are thinly traded and so getting right price in case of emergency is a problem.
Useful Tips:
Prefer Government organizations or high credit rated companies (AAA) as the credit default risk is lower.
Invest only some part of your “regular income generating portfolio” in one company. Diversify across companies.
Some companies offer NCDs subscription in physical form too. In this case TDS is applicable.
Selling NCD before maturity leads to Capital Gains and is taxed accordingly.
Also Read: NCDs – Investment Tips, TDS and Taxation
6. Tax Free Bonds
Tax Free Bonds are good source of regular income for people in 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 Demat account or when companies open bonds for initial subscription.
Expected Return: 6.75% – 7.25% (Tax Free)
The Good:
The interest paid is tax free, so it’s good for people in higher tax brackets
The income is guaranteed.
The tenure of these bonds is up to 20 years, so reinvestment risk is reduced to an extent.
Tax Free bonds are issued by big PSUs and have high credit rating, so have negligible credit default risk.
If you have Demat account, investment and selling can be done online.
The Bad:
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.
7. Government Securities/Bonds (G-Secs)
G-Secs are government bonds issued by RBI on behalf of Government of India. These bonds have tenure of up to 30 years and have no Credit risk. They pay interest every 6 months.
Expected Return: 7.5% – 8% (depending on tenure) changes with interest rate cycle
The Good:
No Credit risk
Long investment tenure of up to 30 years, hence minimal reinvestment risk
Investment can be done online through Demat account or IDBI Samriddhi G-Sec portal
Liquid – Can be easily sold
No TDS on interest earned on G-Secs
Income is guaranteed
The Bad:
The interest earned is taxable according to the income tax slab of the person
The price of G-Secs fluctuates with change in interest rate regime. But if you hold till maturity it does not matter.
8. Annuity
Annuities are offered by Insurance companies. The insurance company pays a fixed amount every month in return for lumpsum investment. Returns vary depending on your age, gender and the type of annuity. Also all NPS (National Pension Scheme) subscribers have to necessarily buy annuity on withdrawal.
Expected Return: 5% to 7% (depending on age and type of annuity selected). Higher aged person would get get better returns.
The Good:
Annuties are easy to manage. Buying is one time process and you get money regularly paid in the bank account.
The income is guaranteed.
There is no reinvestment risk.
The Bad:
Once you buy annuity you are locked in for life.
Usually returns lower than bank FDs.
The interest earned is taxable according to the income tax slab of the person.
Useful Tips:
As the money is locked for life, choose your options carefully.
9. 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:
The rental return generally goes up with inflation.
30% standard deduction along with actual incurred expenses can be deducted from income for computation of income tax.
The Bad:
Initial investment is large.
Difficult to sell off at the right price in case of emergency.
Need to be involved in regular maintenance of property.
Income is not guaranteed as the property may remain vacant for longer period of time.
10. Reverse Mortgage:
Reverse mortgage is a special type of loan where you can get loan against your home. The loan is not paid in one go but in installments. You can think of it as reverse EMI. This is offered by a lot of banks and housing finance companies. Learn more about Reverse Mortgage by clicking here.
The good:
Even though you mortgage the house, you can still live in it.
Your legal heirs can pay the loan (after your death) to the bank and get back the house.
The Bad:
You can outlive the reverse mortgage duration as most banks offer maximum tenure of 20 years.
This option is available for senior citizens only.
It involves lot of paper work.
The loan amount is capped at Rs 50 lakh – Rs 1 crore by the lender. So it does not suit house owners with expensive houses.
11. 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:
The returns are more tax efficient than fixed deposits, so more suited for people in higher tax bracket.
It’s easy to manage. Everything can be handled online.
The Bad:
There is risk of capital running out in case the performance is lower than expected or if there is need to extend the regular income duration.
12. Dividend Income (MIP)
There are some Mutual funds namely (MIPs – Monthly Income Plans) who claim to pay regular money every month. MIPs are debt oriented mutual funds who pay dividend income every month. The problem is the payout can fluctuate and at times funds can skip dividend in certain months. So MIP is misnomer!
There can be dividend income from equities too. But in that case too, the income can fluctuate a lot and there can be years where no dividend is declared.
Expected Return: Similar to Bank Fixed Deposit
The Good:
Easy to manage
The Bad:
The dividend received is tax free but the mutual funds have to pay Dividend distribution Tax while paying dividend.
The income can fluctuate widely as the dividend depends on the performance of the mutual fund for the month. In extreme cases, funds may not declare any dividend for a month.
Useful Tip:
Systematic Withdrawal Plan in Debt Mutual Funds is more tax efficient way than dividend income for investment duration of more than 3 years
13. Dividend Income (Stocks)
You can plan regular income through portfolio of stocks and equity mutual funds. The problem is the dividend can fluctuate every year. Also the payout is not very regular and depends on the performance of the company.
The Good:
Dividend Income is tax free.
The portfolio can have capital appreciation in the long run.
The Bad:
The prices of stocks are volatile and so the portfolio can fluctuate a lot in value.
The income is not guaranteed. Even stock with long term dividend history can skip dividend in certain years.
Should have good skills to select stocks and need to continuously monitor the investment.
To Conclude:
As you can see there are various investment avenues available for generating regular income. You should evaluate each of them and see what suits you the most. It would depend on your risk appetite, duration for which you require regular income and the pain you want to take in handling investments. Ideally you should diversify among various asset classes to minimize risk.
