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Post Office Monthly Income Scheme : why do you invest?

16 Jul

About Post Office MIS

This scheme appeals to conservative investors with traditional values, and for good reason. This scheme offers monthly income and is a safe, guaranteed-by-the-government option. For retirees, widows and others looking for a steady income, it can be ideal. Read on to learn more.

  The Post Office Monthly Income Scheme, or PO MIS, is offered by Indian Post Offices. A lump sum amount is deposited with the post office and monthly interest earned each month is paid out to you. As the scheme is offered by post offices, it is backed by the government. Thus, the PO MIS is one of the safest investments available.

Interest

The rate of interest offered on PO MIS is 8% per annum (year). Interest is paid out every month but direct credit to your bank account remains a problem as Post Offices are not that technologically advanced in India, as such one needs to go and collect the monthly income from the PO directly. However if you have a savings account in the same post office then interest can be credited directly to your account. A 5% bonus is paid on maturity of the fund ( this might have been withdrawn), therefore, the effective yield works out to 8.9% per year.

   The interest earned is fully taxable. There is no tax deducted at source (TDS). The investment in PO MIS is exempt from wealth tax.

 Who is eligible to invest?

Only individuals can invest in PO MIS. You can either open a single or joint account. A Non Resident Indian (NRI) or Hindu Undivided Family (HUF) cannot open a PO MIS account.

 Investment Limit

There is an upper limit on investment in a PO MIS scheme. You cannot invest more than Rs 4.5 Lakhs in a single account. If you invest jointly (2/3 names), the limit is Rs 9 Lakhs. The minimum investment is Rs 1,500.

 Duration

The tenure of PO MIS is 6 years – your investment is locked in for this time period. 

Number of Accounts

Any number of accounts can be opened, but the total investment cannot exceed the upper limit across all the accounts.

  Nomination

You can specify the nominee at the time of opening the account, or at any time later.

  Premature withdrawal, encashment, closure & Penalty

Premature withdrawal of the invested amount is allowed after 1 year of opening the account. If the account is closed between 1 and 3 years of opening, 2% of the deposited amount is deducted as penalty. If it is closed after 3 years of opening, 1% of the deposited amount is charged as penalty. The bonus amount is forfeited when you close the account early.

Why monthly income plans of mutual funds or post office monthly income scheme?

Monthly income plans (MIPs) from mutual funds are in the spotlight for the wrong reason. This hybrid category of mutual fund schemes has offered only 5.93% in the last one year. Compare this with the 8.5% returns offered bypost office monthly income scheme (POMIS).

Over the last one year, interest rates were rising and equity markets were falling which resulted in MIPs not living up to the expectations of the investors

Should one dump MIPs and move to POMIS for superior and guaranteed returns?

First, you have to understand the nature of returns offered by these two products. MIPs though aim to pay each month, they do not guarantee the same; also, the amount of payout is not guaranteed. POMIS, on the other hand, offers guaranteed 8.5% to investors. But POMIS comes with a five-year term.

Even if you are looking for guaranteed returns, you don’t have to limit yourself to POMIS. There are many banks and financial institutions, such as HDFC, which offer better interest rates, with almost no default risk.

HDFC, the housing finance company, offers 8.9% for 47-60 month tenure for individuals and 9.15% for senior citizens under its regular monthly income plan. Under Platinum Monthly Income Plans, HDFC offers 9.4% and 9.65% to individuals and senior citizens, respectively, for 33-month time period.

A POMIS account can be opened by an individual, two/three adults jointly, and a minor through a guardian.

TDS is not applicable on the interest paid by the post office toward POMIS.

The deposits made for the purpose of Monthly income under MIP of Indian Post Office has a lock-in period of 5 years. There is a possibility of withdraw the money after one year but this can be done by paying a hefty penalty. If 

the amount is withdrawn after one year but before three years then 2% of the deposited amount will be deducted. After three years but before five years the penalty percentage will be 1% of deposited amount.

In the event of death of the account holder, the nominee will be eligible for the payment of interest or withdrawal of funds. As this scheme is for senior citizens, I will suggest that better to nominate more than one person as nominee for the said MIP.

 

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Posted by on July 16, 2013 in Uncategorized

 

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