There are a number of us who seek regular income from their investments. This is especially true for retirees. Post offices offer a few schemes that cater to such needs of the investors. In one of the earlier posts, we had discussed Senior Citizens Savings Scheme (SCSS) that offers attractive returns and tax benefits to senior citizens.
Post offices offer other products too where you do not need to be a senior citizen to invest. Post Office Monthly Income Scheme (POMIS) is one such scheme. POMIS offers guaranteed monthly returns. Needless to say, only post offices offer POMIS. Let’s find out more about the scheme and see how it fares against regular bank fixed deposits. Finally, we will assess if POMIS deserves a place in your investment portfolio.
Post Office Monthly Income Scheme (POMIS)
Under this scheme, investors are paid interest monthly. For FY2015-2016, the applicable interest rate is 7.3% p.a. (January-March, 2018) The Government of India notifies the interest rate for the scheme every quarter. Please note the interest rate remains constant for the tenor of the deposit (irrespective of any changes in the interest rate by the Government in the subsequent years).
For the latest update on interest rates for various small savings schemes such as PPF, SSY and SCSS, please refer to this post.
Interest payout is made each month starting one month from the date of investment (and not from the start of month). Since there is regular interest payout, there is no benefit of compounding.
Since the POMIS is backed by Government of India, there is no credit risk.
Such an account can be opened by a resident individual. Non-resident Indians (NRIs) and Hindu Undivided family (HUF) cannot invest in such schemes. Account can be opened in the name of a minor.
Maximum Investment Limit
An investor can invest a maximum of Rs 4.5 lacs in a single account or Rs 9 lacs in a joint account (maximum 3 holders). An account can also be opened in the name of a minor. An individual can open any number of such accounts. However, his/her total share in all the accounts combined (individual or joint) cannot exceed Rs 4.5 lacs. For calculation of share in a joint account, each individual in a joint account is supposed to have equal share.
What happens if you deposit more?
You may not get any interest on the excess amount. Though nothing is mentioned about treatment of excess deposit in Post Office (Monthly Income Account) Rules, 1987, the rules are quite clear about the maximum investment limit.
There is a maximum investment limit of Rs 4.5 lacs per person. It is quite possible that your excess deposits may go unnoticed. However, be prepared that you may not get any interest on the excess amount.
Maturity period is 5 years. The amount can be prematurely encashed /withdrawn after 1 year. Withdrawal after first year till the end of third year will attract a penalty of 2% of the deposit amount. Withdrawal after 3 years and before maturity will attract a penalty of 1% of deposit amount.
There are no associated tax benefits for investments in the scheme. There is no tax deduction for investing in the scheme and interest earned is taxable. There is no tax deduction on source (TDS). You will have to pay tax as per your income tax slab while filing Income Tax returns.
POMIS appears to be good option for those investors looking for regular income. However, a cap on maximum investment limit (Rs 4.5 lacs per person) and lack of any favourable tax treatment takes away the entire sheen. Additionally, the penalty for premature withdrawal is quite high. A regular bank fixed deposit with monthly payout is just as good. You can find FDs with competing or even better interest rates. Bank FDs also do not have a maximum investment limit.
Investors can opt for a tax savings FD (with lock-in of 5 years) too with a monthly interest payout. This way, they can get tax benefit under Section 80C too. However, the maximum tax benefit is limited to Rs 1.5 lacs per financial year.
Senior Citizens get even higher interest rates for FDs. They also have an option of investing in Senior Citizens Savings Scheme (SCSS) at a much higher interest rate (9.3% per annum for FY2016, quarterly payout). The maximum investment limit is Rs 15 lacs and there is tax deduction under Section 80C too.
So, nothing really special about POMIS. You can easily give this scheme a pass.
Deepesh is a SEBI registered Investment Adviser and Founder, PersonalFinancePlan.in