Earn regular income from investment

You are a couple of years away from retiring and wondering how to manage your monthly expenses in the absence of a salary. Or you want to leave your high-pressure corporate job and start something on your own. How do you pay for expenses during this time?

There are instruments that will give you a regular income, just like a salary. Which is the best one for you based on returns, taxation, risk profile, etc? Read on to know more

Plan your finances in advance

As an investor, you must first evaluate your own goals, says Navin Chandani, chief business development officer, BankBazaar. "You must take into account your liquidity requirements and factor in inflation, and then build a diversified pension portfolio just like an investment portfolio. This will make sure that you have income coming in from various sources instead of just one,'' he says.

Today, there is an increasing trend of people wanting to give up their jobs, or retire early and look for a combination of a consulting job and some charitable role where they don't make a significant salary, says Anil Rego, founder and CEO, Right Horizons.

"Liquidity, tax efficiency and risk-profile are the conditions investors must keep in mind. As you get closer to retirement and you need to start withdrawing your money, you need to start building equity. So, you cannot depend on equity for your monthly requirement. But at the same time, if you are retiring early, you may still have goals that are yet to be met, such as children's education or EMIs to be paid off. Then you could have 40% in equity assets. Hence, it is necessary to have a combination of assets and a strategy in place,'' he says.

Let us look at some of the instruments and features

Post-office monthly income scheme (POMIS): It is a risk-free government-backed savings scheme generating interest returns at 7.7% per annum payable on a monthly basis (subject to revision each quarter). It can be opened and operated by any resident Indian, minor above 10 years and in the name of the minor below 10 years by the legal guardian. The minimum contribution to start the account is Rs 1,500 whereas the maximum amount that can be invested is Rs 4.5 lakh and Rs 9 lakh by a single and joint holders respectively. The maturity tenure of POMIS is five years and the interest earned is taxable; premature closure is available subject to deductions as applicable.

Life insurance annuity plans: In an annuity plan, the life insurance company invests on behalf of the benefactor and the returns generated are passed on to the investor after making necessary operational deductions.

"The tenure of investment and minimum amount required to operate an account varies depending upon the life insurance company and scheme chosen. An annuity is a low-risk and low-return investment vehicle wherein the annuity amount received is taxable in the hands of the benefactor,'' says Tarun Birani, founder and CEO at TBNG Capital Advisors.

If there is a chance that you may face a fund deficit during retirement, or may need to make a large, unexpected expenditure, then tying up your assets in an annuity could cause problems. However, if you have a large enough corpus, an annuity is a good idea because of the secured payment stream that it provides.

"What would be best is to invest in a product like National Pension System and build up a substantial corpus by retirement. Then you can invest part of the corpus in an annuity so that you get to enjoy an assured income without worrying about liquidity. POMIS, on the other hand, is a low-risk and low-returns product, ideally suited for those with a low-risk appetite. However, it does not beat inflation, and the cap on investment means that returns could be only part of the annuity,'' says Chandani.

Fixed deposits: FDs are low-risk investment instruments offered by banks and non-banking financial companies wherein one can deposit money ranging from seven days to 10 years maturity period. The interest earned varies depending upon the amount invested, investment term and bank chosen. The interest received is taxable in the hands of the investor and TDS is applicable if the total interest income exceeds Rs 40,000 in a given financial year.

Corporate deposits: It is offered by non-banking financial companies or housing finance companies. Interest rates depend upon the rating received for the instrument and the investment tenure. Interest earned is fully taxable.

"CDs are unsecured and carry comparatively higher risk as compared to bank FDs. The minimum deposit amount varies across tenure and companies,'' says Birani.

Senior Citizen Savings Scheme (SCSS): It is a specialised risk-free scheme offered by the post-offices to those above 60 years of age and individuals who have opted for voluntary retirement or superannuation between the age brackets of 55-60 years of age. The minimum investment required is Rs 1,000; maximum investment is capped at Rs 15 lakh. However, an investor is permissible to invest in the scheme only once. Investments made in SCSS are eligible for deductions up to Rs 1.50 lakh under section 80C. Interest is taxable and payable every quarter (8.7% for the last quarter), subject to revision on a quarterly basis as well. TDS is applicable if the total interest earned in a financial year exceeds Rs 10,000.

"FDs and small savings schemes are suitable for those in the lower tax bracket. Remember that at times returns from small savings schemes could be higher than FDs while at times FDs could offer higher returns. But small savings are not as liquid as FDs, and hence should form part of your illiquid portfolio,'' says Rego.

Systematic Withdrawal Plan (SWP): SWP is a redemption strategy that allows you to redeem a pre-determined amount from your MF investments at regular intervals - be it monthly, quarterly or semi-annually. The amount chosen gets directly credited to the bank account on a specified date. This helps in deriving regular cash flows from your lumpsum investment or existing corpuses in a systematic disciplined way while benefiting from capital appreciation on the non-redeemed part.

"SWP also offers higher liquidity as the investor can redeem underlying mutual fund lumpsum to meet his shortfall,'' says Naveen Kukreja, CEO and co-founder, Paisabazaar.com.

The taxation of an SWP would depend on the underlying MF scheme. Gains booked from redeeming within one year of an investment in equity and equity-oriented hybrid schemes will attract short-term capital gains (STCG) tax of 15%. Those booked after one year will attract long-term capital gains (LTCG) tax of 10% if the total gains booked from equities exceed Rs 1 lakh in a financial year. In case of debt funds, gains booked within three years of investment is taxed as per the tax slab of the investor, whereas those booked after three years attracts LTCG of 20% after indexation.

Dividend payout option of MFs: Dividend MFs are where dividends are given to investors at intervals by the mutual fund company. An MF scheme declares a dividend from its profits generated in the scheme. Frequency of the dividend payments (daily, monthly, quarterly, annually) option is decided by the MF.

"SWP assures a regular fixed amount at a regular selected interval, but in a dividend, the amount is not fixed. Dividends cannot be guaranteed by a mutual fund and are subject to market conditions, distributable surplus and profits made by a scheme. Compared to this, SWP is more reliable than the dividend plan,'' says Birani.

PLAN WISELY

• Those close to retirement and needing regular income, cannot depend wholly on equity 
   
• If you may need to make a large unexepcted expenditure don’t tie up assets in illiquid assets