Savings Tip: Quartelry Income Scheme

Post Office Monthly Income Scheme ( MIS ) is very popular among the masses, especially those retired.

Its features are:
1. Monthly income at the rate of 8% per annum + 5% bonus on maturity (which works out to be an effective yield of 8.9% )
2. Income is taxable, but no TDS.

Some of its disadvantages are:
1. Interest rates are not in-line with the market rates. As recently as October-November 2008 when banks were offering more than 10% on fixed deposits, the MIS interest rate was still 8%
2. There is a ceiling on maximum investment.It is rupees 3 lakhs for a single account.
3. Cumbersome visits to the post office and sometimes you have to face long queues ( although this can be resolved by following one of my previous post )
4. Restrictions on pre-mature withdrawal. You cannnot close an MIS account before 1 year.

All the above disadvantages can be overcome by employing the Quarterly Interest option offered by Bank FDs. Usually when customers open a fixed deposit ( FD ) with a bank they go for the cumulative option where interest keeps on accumulating and is paid out only on maturity. Instead they can go for a quarterly interest option FD where the interest is calculated and paid out quarterly. Most banks ( public & private ) offer this option of quarterly interest payout, which can also be credited to your bank account.

With a litte bit of self-discipline you can use this Quarterly interest option as a replacement for MIS. Some banks also offer the monthly interest payout FDs but the interest rate on such FDs is usually lower ( by around 0.5% ).

Let's see how we have overcome the above disadvantages of PO MIS by replacing them with Bank FDs:
1. The interest rates are in line with the market rates. If the interest rates in Banks are higher than POMIS, it makes sense to go for Bank FDs.
2. No upper limit on investment.
3. Interest can be credited to your bank account directly.
4. No restrictions on pre-mature withdrawal. You can break an FD whenever you wish to.

Tax-treatment is same as MIS, except for the fact that TDS is applicable.

NABARD Bhavishya Nirman Bonds

Bhavishya Nirman Bonds ( BNB) are currently on offer from National Bank for Agricultural and Rural Development ( NABARD ).

In their ads, NABARD are proudly claiming an interest rate of 12.18%, but Investors must keep in mind 12.18% being advertised is the simple rate of interest. The compounded interest rate is 8.93%
This may seem a bit on the lower side ( comparing the high interest rates, currently prevalent for Bank FDs ), but it has some benefits vis-a-vis Bank FDs.

Let analyse BNB features to understand it better:
1. Every BNB has a face value of Rs. 20,000/- and the issue price is Rs. 8500/- which means that one can buy the bond certificate for Rs. 8500/- now and encash it after 10 years for Rs. 20,000/-

2. It is a zero coupon bond ( i.e. interest rate offered is 0%), but all benefits come in terms of capital appreciation ( a bond bought at Rs. 8500/- appreciates to Rs. 20,000/- in one year ). Since the income comes in form of capital gains and not as interest earned on deposit, different tax rules apply. The gains are taxable under long term capital gains which carry a lower tax rate.

3. BNB are tradeable on BSE ( Bombay Stock Exchange ) to provide early exit option for investors.

4. But there are no tax savings available under 80C for investments under this bond.

People in higher tax slabs looking for tax savings in terms of lower tax would like to invest in these. But keep in mind tax laws may change!

The cheapest term life insurance

I often advice people not to combine insurance and investment and the only insurance product which offers such a possibility is term life insurance.
First let's try to find out what's term life insurance. Wikipedia has a very good definition for it.
In simple, term life insurance provides you only insurance and you don't get anything at the end of policy term ( on survival ). Hence those who opt for it treat insurance as a cost ( or expense ) rather than an investment.

Recently I came across this page on the personalfn website. This page lists down the premium charged by different life insurance companies in India for term life insurance. As you would notice the lowest premium is charged by SBI Life Insurance ( which is owned 74% by the State Bank of India ).

An year back, when I was evaluating Indian Life Insurance companies to purchase a term insurance plan, I had chosen SBI Life. In hindsight, that looks like an intelligent decision.
To be precise, I had bought the option under which the "Sum assured increases by 5% annually" so that the Sum assured can atleast keep pace with inflation. But after I had purchased this policy I got a shocker. The 5% increase per annum is not compounded as I had thought, but is rather caluclated as simple interest on the original sum assured. Still SBI Life Shield looks the best that is on offer presently, since no other Inusrance company offers this facility of increase in Sum assured annually.

Disclosure: I am not associated with SBI Life in any way, except for the fact that I have purchased SBI Life Shield, their term insurance plan last year. If you are aware of any other Life insurance company offering a lower premium for term insurance in India, please do comment and I will update this post accordingly.