A Monthly Income Scheme is a deposit option with a bank or a post office or an investment with a mutual fund that earns regular interest and extends pay-outs on a monthly basis.
Monthly Income Fixed Deposit Scheme
Monthly Income Scheme with a bank is similar to a Fixed Deposit held with the bank, the only difference being that the interest is not accrued, but given out as a form of income. This monthly interest paid will generally be at a discounted value from the regular FD rates. MISs are generally linked to a savings account held with the same bank, where the monthly income can be disbursed. The objective of such schemes is to provide the account holder with a guaranteed fixed income for meeting his expenses, especially in case of retired individuals. Many banks offer higher interest rates for senior citizens. Such schemes offered by banks are risk-free and the pay-out is fixed.
Common features of Fixed Deposit MIS
- The interest pay-out on MIS FDs is generally at a discounted rate from regular bank FDs, due to the monthly disbursements.
- The minimum and maximum investment limits are set as per individual banks.
- There is usually a TDS deduction on interest income up to 40,000 a year, but one can avoid such TDS by submitting Form 15G/15H if his total income does not fall within the tax bracket, or he has availed exemptions to reduce his taxable income.
- Many banks offer loan or overdraft facility against MIS to meet any financial emergencies
- Most banks divide the tenure of the MIS into 2 phases – Investment phase and Pay-out phase (or Benefit phase). Tenures of both phases differ from bank to bank. It could be distributed anywhere between 12 months to 60 months, or even more.
Post Office Monthly Income Scheme (POMIS)
MIS is also offered by Post Office in India under the purview of the Finance Ministry, and is hence a more trusted scheme than other MIS. It is a low risk product with a fixed, steady income and capital protection. The latest interest rates for POMIS are 7.8%. These are revised very quarter by the Finance Ministry.
Common features of POMIS
- POMIS account can be opened only by resident Indians, and not NRIs.
- The maturity period of this scheme is 5 years from the date of opening the account.
- POMIS can be held individually or jointly among maximum three holders.
- This account is shared with all the joint holders equally, irrespective of the contributor.
- There is no limit to the number of accounts held under POMIS, however the cumulative amount for individually held account cannot exceed ₹ 4.5 lakhs, while for jointly held account cannot exceed ₹ 9 lacs.
- The minimum amount for this account must be ₹ 1500, and in multiples thereof.
- Nomination facility is available
- This account can be easily transferred from one post office to another.
- This account can also be opened for a minor of more than 10 years of age.
- In case of minor account, the investment limit is 3 lakhs, which can be upgraded once the minor child becomes an adult.
- The maturity corpus at the end of the scheme can be reinvested in the same scheme for another 5 years.
- This account can continue to earn interest for up to 2 years after maturity if the corpus is not withdrawn by the account holder. The interest rate will be as per the standard Post Office savings account.
- There are no tax exemptions on this scheme.
How to open a POMIS account
Opening a post office monthly income scheme has become relatively easier than before. Following are the steps to open the account.
- Firstly, a savings account needs to be opened with the post office.
- Then fill the POMIS application form available at the post office.
- Submit the same along with copies of ID proof, address proof and 2 passport-size photos and show originals for verification.
- Take the signatures of a witness or nominee(s) on the form.
- Deposit the required amount via cash or cheque.
One can withdraw the entire amount from POMIS prematurely subject to the following conditions:
- Withdrawal between 1 - 3 years will attract 2% penalty on the deposit.
- Withdrawal between 3 - 5 years will attract 1% penalty on the deposit.
Mutual Fund Monthly Income Plans (MIPs)
Monthly Income Plans of Mutual Funds are very different from Post Office and Fixed Deposit MIS. They are essentially debt-oriented hybrid schemes with 80% of the corpus allocated in debt instruments and 20% in equity. The monthly pay-out is in the form of dividends to the investors, subject to the availability of a distributable surplus. Hence, there will be no pay-out in the absence of a surplus. Due to the equity component, there is a certain degree of risk associated with such funds, and there is no guarantee of monthly returns, unlike Post Office and Fixed Deposit monthly income schemes. However, historically Mutual Fund MIPs have outperformed both the above categories, and proven to be a consistent, low-risk investment to generate monthly income.
Features of MIPs (Mutual Funds)
- It has exposure to debt as well as equity markets. This balances the risk return due to diversification in portfolio.
- There is no guarantee of Income, as the fund performance depends on the bond market and equity market performance.
- MIPs have a lock-in of one year, redemption before which attracts an exit load of 1%.
- MIPs are taxed as debt products. Short term capital gains (<3 years) are taxed as per investors slab rates, while Long term capital gains are taxed at 20% with indexation and 10% without indexation benefit.
There are two options of investing in MIPs:
- Growth Option: This option is for investors looking for capital appreciation by reinvestment of profits into the scheme, instead of pay-outs as dividends.
- Dividend Option: Here the investor opts for a dividend from the profits generated by the scheme, which can be either paid out or reinvested in the scheme.
Insurance Monthly Income Plans (MIPs)
MIPs are also offered by insurance companies, where, along with the benefit of monthly income, the investor also receives an insurance cover and a maturity benefit. These plans could either have two separate phases, namely premium payment phase and pay-out phase, or they could have pay-outs while the premium payment phase is ongoing. Other benefits like guaranteed maturity benefit, interim benefits, bonus amount, etc. are dependent on the insurance company and the policy chosen.
Features of MIPs (Insurance)
- The monthly income in this case is guaranteed and fixed. It is a direct deposit in the bank through an electronic clearing system.
- Some plans offer pay-outs after the premium payment phase has ended, while some plans start the pay-outs after a few years from the start of the policy.
- Investors can choose to receive a lumpsum benefit at the end of the tenure in addition to the monthly income, or they can opt for distributing this lumpsum benefit over the span of regular payments.
- All such MIPs offer insurance cover in case of any unforeseen contingency as defined by the plan. The pay-out of the cover can be in lumpsum or in instalments as per the investor’s requirement.
- Some plans offer bonuses like reversionary bonus, interim bonus and terminal bonus dependent on the performance and at the discretion of the company.
- Premium payments could be annual, half-yearly, quarterly, monthly, or one time. One-time premium payment is tax inefficient as it only qualifies for tax exemption for that year. By distributing the premium over the policy tenure, you can claim exemption on them for every year of payment.
- Which is better, MIS offered by Banks and Post Office, or MIPs offered by Mutual Funds and Insurance companies?
- There are quite a few differences between MIPs offered by different entities. Below is a comparison of all 4 products:
|Fixed Deposit MIS||Post Office MIS||Monthly Income Mutual Fund||Monthly Income Insurance|
|Assured income as per the FD rate. (discounted due to monthly pay)||Assured income at 7.8% annual rate||No guaranteed income due equity and debt component.||Monthly annuities (rates vary based on premiums & period)|
|TDS is applicable, taxed as per slab rates||No TDS, but taxed as per slab rates.||TDS applied, taxed as per capital gains.||Annuity is taxable as per slab rates.|
|Fixed rate of return||Fixed rate of return||Floating rate as per the market movement||NA|
|Low risk||Low risk||Medium risk||Low risk|
|Prematural withdrawal terms and penalties differ from bank to bank.||Withdrawal permitted after 12 months with penalty||Exit load applicable if withdrawn before time||Higher surrender charges as this is a long-term investment|
|No investment limit||Limit of Rs. 4.5 lakhs per account and Rs. 9 lakhs for a shared account||No investment limit||No investment limit|
- Can I add a nominee to my POMIS some time after opening my account?
- Yes, you can add a nominee anytime during the period of the account. For this you need to fill a prescribed form available with the post master.
- Is it a good idea to invest in Mutual Fund Monthly Plans since the returns are not guaranteed?
- Even though the returns in Mutual Fund MIPs are not guaranteed or fixed, they have historically given better returns due to equity component and aggressive management of debt. However, it is more tax efficient to invest in debt MFs and Equity MFs separately, because MIPs are taxed entirely as debt mutual funds, including the equity component. One can looks for dividend option in debt and equity funds to generate a source of income as an alternative to MIPs.
- What are the returns on Monthly Income Plans of Mutual Funds compared to Post Office Monthly Income Schemes?
- Average returns on Monthly Income Plans range from 6%-12% depending on the equity component and investment strategy. Returns on Post office MIS currently stand at 7.8%. An investor with a medium to high risk appetite can consider MIPs of Mutual Funds while a low risk investor looking for a regular retirement income can consider post office MIS.
- Which are the best MIPs currently available in the market?
- (SMEs can answer based on Finbingo recommendations)