PostOffice Monthly Income Scheme

Hustle-bustle of stock market, green and universal fight of bulls and bears, red lines on charts, fortunes going up and down with stock market..all these things may raise our heart beat but among all these hustle-bustle there is a set of investors who want to invest in assets that provide monthly cash flow to meet their expenses.

This article is aimed at such investors who look for monthly income from their investment.

What is monthly income plan?

• Monthly income plans are investment instruments that provide monthly return on your investment. Individuals have to invest a certain amount of money in such products and get pre-defined monthly income or income based on market situation.

• Since these plans have to deliver monthly returns, they invest a significant part of their assets in safe instrument such as Government and corporate bonds.

Monthly Income Schemes in Post Offices(POMIS started in 1987) :

• Post offices are providing one of the successful Monthly Income Scheme. The main reason for the popularity of this plan is monthly the depositor gets interest correctly without any risk.There is guarantee by the government on the total amount of money deposited. . . 

Salient features:

• Duration of scheme is for 6 years.

• 8% of interest will be given by the post office monthly income schemes

• 5% bonus on principal amount is admissible on maturity that is, 6 years. 

• Post maturity Interest- if you leave the money in the account, but then it would earn the interest at the rate applicable from time to time (at present 3.5%) for next 2 years.

• Auto credit facility to SB Account- If the depositor directs this interest to the recurring deposit in post office there is a chance of getting 10.5% interest rate on total amount.

• ECS facility- You can opt for a ECS facility whereby your monthly interest amount will be credited to any savings account of your choice. After you open the POMIS account, you need to fill up the ECS form, attach a blank cheque of your bank savings account and that's all. You don’t need to open a Savings account at the Post office just for credit of monthly interest. But this facility is available in 36 cities only.

• Type of Account	Minimum limit	Maximum limit
  Single	INR 1500/-	INR 4.5 lakhs
  Joint	INR 1500/-	INR 9 lakhs

• Premature withdrawal of money- In case of necessary situations depositor can discontinue the plan. 

• If you break it within 1-3 yrs : 2% penalty on Deposit amount
• If you break it after 3 yrs : 1% penalty on Deposit amount

• Eventual returns if you act smartly- The Post office website claims that if you deposit in Monthly Income Scheme and invest interest in Recurring Deposit you get 10.5% (approx)interest which is just to attract investors and not give a complete picture.

• True picture of the return is- POMIS 8% + RD 10.5% (Annually)+5% bonus on principal amount at the end of maturity. Since both POMIS and RD interests are taxable so the after-tax return would be lower than projected by Post office site. And note that 10.5% is only available on the RD of interest, not the original deposit. Hence the effective interest rate would be closer to 8.77%, which is very good.

Current Scenario- The scenario is changed in Jan’11. 

• For example, HDFC bank is giving 9% for 2+ years and almost all bank deposit rates are much higher than POMIS. 

• The banks like HDFC also ready to give out interest money on monthly basis. That too they credit to your account and you can withdraw using ATM card whenever you want.

• In this changed environment, it does not seem to make any compelling reason to invest in POMIS. But the catch point is that the Bank will deduct 10 % TDS straightly on the Interest earned on any FDs and if you don’t provide PAN, the TDS will be 20 %.

Advantages of POMIS:

• Risk-less Plan (most compelling point in POMIS favor) since its a government scheme.

• Specially suited for retired employees/ Senior Citizens or any one with high sum for investment .

• No TDS cut in this scheme.

• There is a facility to link this plan to savings account opened in Post office and the money will be credited to savings amount.

• A minor above age 10 years  can open an account on his/her own name directly. There is a limit of 3 lacs for guardian and it would not be clubbed with guardian limit.

• Non-Resident Indian / HUF cannot open the Account.

• You POMIS account can be transferred  from one post office to any Post office in India free of cost.

Disadvantages of POMIS:

• This post office saving scheme does not come under sec 80C so there is no tax-exemption for the amount you invest in this, and interest income is taxable, but there is no TDS cut in this scheme. 

• Penalty should be paid in case of discontinuity of scheme.

• There is no chance to invest more than 4.5 Lakhs from single account and 9 Lakhs for joint account.

• If the interest payable every month is not claimed by a depositor, such interest will not earn any additional interest but will be safe.