Monthly income plans can provide you with an alternative stream of income. Various types of monthly income plans can become your source of income if your regular source of income suffered a setback due to some mishap.
Investors usually rely on the term insurance to look after their financial needs after disability or other such mishaps. But here's the catch. Term plans often work in extreme conditions and most of their benefits are directed toward your family member’s survival.
On the other hand, monthly income plans (MIP) can support your financial needs along with your family’s while you are alive.
What is a Monthly Income Plan?
Monthly Income Plans (MIPs) are debt-oriented hybrid mutual funds that offer a regular monthly income to the investor. The proportion of investments in equity funds is low, but it offers the benefit of higher returns in addition to the stability offered by the debt proportion. Monthly income plans are more prevalent in the mutual fund industry space, and these types of plans are also called as monthly guaranteed income plans, monthly pension plans, or assured monthly income plans in the life insurance industry.
It provides a steady stream of income in the form of dividends and interest payments. Therefore, this plan is most suitable for retired persons or senior citizens who do not have other substantial monthly income sources.
Investment Plans for Monthly Income
Monthly Income Plans are the best alternative source for the ones who assure regular income as their backup. It is an investment plan where an individual receives a certain sum of money every month accrues after a few years of payment of the premium. This plan is mostly referred to as monthly guaranteed income plans, assured monthly income plans, or monthly pension plans.
Below is the list of plans that you can consider for a monthly income:
1. Life Insurance Plans
2. Post Office Monthly Income Scheme (POMIS)
3. Senior Citizen Saving Scheme (SCSS)
4. Mutual Funds Monthly Income Plan
5. Fixed Deposits
6. Systematic Withdrawal Plans (SWP)
7. Long Term Government Bonds
8. Corporate Deposits
9. Annuity Plans
10. Equity Share Dividends
11. Pradhan Mantri Vaya Vandana Yojana
Monthly Income Plans are primarily associated with Mutual Funds. These invest in securities and offer you a monthly pay-out. But monthly income schemes are offered by Life Insurance companies as well. These plans are slightly different. These plans apart from providing you with a steady income source along with a life cover.
Types of Monthly Income Plans
Monthly Income Plans can be broadly classified into two categories. Though both of them provide you with a steady payout, they have a different approach.
1. Dividend Based Monthly Income Plans
If your MIP is dividend-oriented, then you will receive monthly payouts in the form of dividends.
Under these plans, when the fund in which you have invested performs well and creates a surplus, you get a dividend from the surplus. But there is no surety that you will get dividends every month. These are paid to you only when the said fund earns profit from the market.
The dividend that you receive is tax-free.
2. Growth Based Monthly Income Plans
Unlike dividend-oriented plans, growth-based MIPs do not provide you dividends. The profits that you earn from your funds are re-invested in the fund.
The fund you invest in contains the money of other investors as well. You are allotted parts or ‘units’ of your fund. These are calculated based on your fund’s net asset value (NAV). So, when you earn profits, these get added to your NAV. This is a suitable option in case you can want to grow your wealth and can do with no regular income.
Features of Monthly Income Plan
Monthly Income Plans have been known to generate better long-term returns than pure debt funds due to the equity component in their portfolio. On average, Monthly Income Plans have delivered 10% to 12% returns, which is a lot more than most other fixed-income investments. However, the dividend pay-outs are at the discretion of the fund company, and thus, are not guaranteed.
The Monthly Investment Plans offered by insurance companies include a life cover as well. Thus, apart from getting a monthly payout, a MIP makes sure that your family stays financially protected as well.
Here are some interesting features of the best monthly income plans:
1. Delivers more returns than other similar saving schemes and fixed deposits in terms of returns.
2. No limit on the investment for monthly income plans.
3. You do not have to pay any entry load or processing charges.
4. The exit load cannot exceed 1%.
5. High liquidity.
Benefits of Buying a Monthly Income Plan
A monthly income plan may offer you a lot of benefits, such as:
1. Monthly Payment
The purpose of a Monthly Income Plan is to provide you with monthly pay-outs. In your working life or even after retiring, all your expenses are likely to be monthly. These plans offer you a monthly pay out that acts as a strong income source, which can be used to meet these expenses. Thus, monthly payment ensures that you do not have to rely on anyone or tap into your savings.
2. Power of Compounding
You need to pay premiums till the payment duration when you buy a monthly income plan. Also, if you opt for the growth-based monthly income plan then your returns gets reinvested in your funds, that is, instead of giving you the profit, they will now be added to your funds. This allows you to take the benefit of compounding and create good wealth.
3. Lump-Sum Benefit
The best monthly income plans provided by life insurance companies offer lump-sum benefits as well.
A lump-sum benefit is a single large payment that is provided at a specific date or at the occurrence of a certain event. This benefit is generally given at the end of the policy term.
4. Guaranteed Regular Income
This is one of the main reasons for the popularity of monthly income plans – they offer a guaranteed and regular source of income. This means that you are assured to get a sum every month.
With these plans, you do not have to worry about the day-to-day performance of your investments. You will get regular and most likely steady returns. That is, your sum can vary, but it will be provided regularly.
A monthly income plan is perfect for you if you are retired and looking to get your monthly expenditures through.
5. Higher Returns
A monthly income plan can give you higher returns than other fixed securities in the market. If we consider the past performances of both, you will see that returns offered by MIPs are more attractive while on the other hand returns of fixed options are low.
6. Insurance Cover
A major advantage of buying a monthly income plan from life insurance companies over the plans from mutual funds is the coverage that you get.
These policies provided by insurance companies come with an insurance cover. Thus, apart from receiving monthly payments, this plan ensures that you are protected if something unexpected happens. This takes a load off your mind and provides you peace. Insurance companies also allow you to enhance your cover by choosing riders as well.
7. Tax Benefits
A monthly income plan offers tax benefits as well. These plans can help reduce your tax liability, i.e., the tax that you have to pay every year. Thus, with such plans, not only you are getting a monthly return, but also saving taxes.
A monthly income plan offers tax deductions u/s 80C and 10(10)D of the Income Tax Act 1961.
Best Monthly Income Plans you should Consider
Regularity of income is what we need for a stable financial life. You may also want to ensure that you have a regular and stable source of income. Monthly income plans not only helps you bring stability to your working life but also helps post your retirement. Below are some of the best monthly income schemes that you can consider:
1. Life Insurance Plans
Life insurance plans offer some of the best long-term monthly income investment options. You can invest with a single premium mode or for a few years to build a bigger corpus and for a higher income. Once the premium payment term is over, the policy will start giving you monthly pay outs.
Life insurance cum saving plans offer multiple other benefits such as:
- Life cover for the duration of the policy
- Bonus additions for a long investment term
- Guaranteed returns
- Option to receive income
- No maximum limit of investment
- Higher rate of income for higher premium amounts
2. Post Office Monthly Income Scheme
A post office is not just a place where you can send and collect your letters and documents. Over the years, post offices in India have provided many attractive investment schemes. POMIS is one of the safest investment options for getting monthly income. This is an investment that has low risk and comes with security.
POMIS is suitable for you if you are looking to invest safely for a continuous income. Here are the important features of POMIS:
- Investment duration is 5 years.
- Interest rate of 6.60% (w.e.f. 2020.
- POMIS allows you to open a joint account, thus, you can add your partner to your account as well.
- You can invest up to Rs.4.5 lakh or Rs 9 lakhs if you have a joint account.
- The interest is paid to your savings account every month, provided you have linked a post office savings account to the POMIS.
3. Senior Citizen Saving Scheme
Senior Citizen Saving Scheme is one of the best monthly income schemes specifically designed for senior citizens that pays out every month. Thus, if you are 60 years of age or above, you can take benefit of this scheme. It can help you earn a higher return with minimum risk involvement.
In the SCSS, you can invest lump-sum money in the account. This money will be converted into a regular income stream. All you need to do to enrol in this scheme by visiting a certified bank or post office. But note that you must enrol within one month of your retirement.
Here are some features of SCSS:
- The period of investment is 5 years, but it can be increased by 3 more years.
- The rate of return is currently at 7.4%.
- The minimum you can invest is Rs 1000 and the maximum limit of investing is Rs 15 lakh.
- TDS is applicable on payouts exceeding Rs 50,000.
4. Mutual Funds Monthly Income Plan
Mutual funds offer multiple types of funds based on asset mix and investment strategies. Two investment options which you must choose with your mutual fund investments are:
- Growth Option
- IDCW (Income distribution cum capital withdrawal) Option
With the IDCW option, you can receive a monthly (or in any other mode) sum of money from the mutual fund. Do have a look at the mutual fund portfolio to understand its risk profile. Gilt funds are the safest option in this direction, while dynamic funds could be the riskiest.
Additionally, since mutual funds do not guarantee a fixed rate of return, you may face variable pay-outs. However, IDCW mutual fund investment may offer better long-term growth than other investments.
5. Fixed Deposits
This is one of the best monthly income plans if you want reasonable returns at low risk. This is because a fixed deposit gives you guaranteed returns. All you need to do is to invest in lump-sum and get returns.
A fixed deposit account can be opened with any of the banks. You need to select a time frame for which you will keep your invested money in the account. During this time, you gain interest on a monthly basis. Thus, at the end of the term, you receive your principal with interest.
- The minimum duration for which you can open FD is just 7 days and the maximum duration is of 10 years.
- Different banks offer different rates they typically range from 4-6%.
- An FD allows you to withdraw partially, but the interest can reduce.
- Is available for tax deductions u/s 80C.
- This type of deposit is mainly recommended for pensioners or senior citizens.
6. Systematic Withdrawal Plans
The term SWP stands for Systematic Withdrawal Plan. SWP is one of the best plans for monthly income. This is also one of the easiest ways to turn your lump sum investments into steady monthly income. Units are created of the fund based on their NAV. You are allotted units on the proportion of your contribution to the fund. Through SWP, you need to specify the amount that you want to receive every month. The units worth your amount will be redeemed regularly to provide you with the money.
7. Long Term Government Bonds
Are you looking for a long-term investment to park your funds in and still get promised a return? If yes, then a government bond can be a good investment option for you. It is a low-risk monthly investment income option.
A government bond, as suggested by the name is a debt instrument that is issued by the government so that it can raise money for the development of the country.
Since these are backed by government, you are assured of the return. You can purchase a bond with an investment component to get monthly returns as well.
- These are for the long term, varying from 10-20 years.
- Interest rates are usually in the range of 7-10%.
- Tax-free bonds are available that have no tax on interest paid. However, only pay about 5-7% p.a. as coupons.
- Long-term government bonds usually pay the coupon interest every six months or twice in one financial year.
- Tax-free bonds will pay interest once in a financial year.
- These bonds do not offer a cumulative option. So, investors must receive (withdraw) the interest in time.
8. Corporate Deposits
Corporate Deposits, also called corporate fixed deposits is one of the best monthly income plans and works in a similar manner to a regular FD. You are required to invest a certain amount at once and you get a fixed rate of interest.
But unlike regular FD’s, corporate FD’s are issued by the companies. These include NBFC’s and even housing corporates.
Since corporate deposits are offered by financial institutions and companies, these can generate higher returns on investment than a regular bank-based fixed deposit.
- The duration ranges from 6 months to 3 years.
- You will earn more interest from corporate deposits if you are a senior citizen.
- To check whether the corporate deposit is credible you are required to check CRISIL ratings.
- CRISIL rates these programs on a 14-point scale. This ranges from CRISIL D to AAA.
9. Annuity Plans
Annuity plans are life insurance plans in which you can put large lump sum investments and give you the option to receive a regular sum. You can select the term of the income payment and the frequency.
These plans allow you tax saving of up to Rs 1.5 lakhs along with the following benefits:
- Receive a regular income
- Leave a legacy for your children and grandchildren
- Option to receive a growing income
- Bonus additions
- Tax benefits and emergency financial support
- Invest jointly with your spouse to continue the pension for your spouse after your demise
10. Equity Share Dividends
Shares, especially the blue-chip stocks of the companies with some of the largest market shares in India also offer regular dividends. You can invest in these stocks to receive a regular stream of income along with the capital appreciation on your investments.
The dividend income is fully taxable, however, and TDS will apply on dividends above Rs 5000. Yet, the prospect of capital appreciation and long-term capital gains on the investment is a lucrative benefit of this investment.
11. Pradhan Mantri Vaya Vandana Yojana
Pradhan Mantri Vaya Vandana Yojana is a pension scheme for senior citizens from the Government of India. The scheme has been extended up to the end of FY 2022-23. It offers a guaranteed rate of return with monthly pay-outs for better liquidity.
Other salient features of the scheme are as follows:
- Start investing at the age of 60.
- The policy term is 10 years.
- The maximum investment per family (pensioner, spouse and dependents) is Rs 15 lakhs.
- The interest rate on the invested money is fixed for the policy term.
- The present rate of interest is 7.4% and is subject to revision every year.
- Interest on the deposit is payable as monthly income or in any other frequency you select with a minimum being once per year.
Who should Invest in a Monthly Income Plan?
A monthly income plan is an investment option that provides you monthly returns. They are usually debt-heavy with a certain component of equity as well. These plans are quite popular due to their effectiveness and ability to cater to a large section of people.
The individuals who can benefit the most through this policy are:
After retirement, you no longer receive your regular income, but your expenses are still there. Monthly income plans can provide you with safe and steady returns. This can create an income stream that you can use to meet your expenses post your retirement.
2. Risk-averse Individuals
Monthly income plans can help you if you do not like to take much risk and would rather want to park your funds in a safer investment. These plans are debt-heavy and thus involve lower risk.
Factors to Consider before Buying a Monthly Income Plan
The earnings under a monthly income plan are taxable as it is debt-oriented mutual fund. You have to pay tax on dividends and tax on capital gains. Following factors will help you know the things better before investing-
1. Financial Goal to Achieve Short-term and Long-term Gains
Before investing in a Monthly Income Plan, you should jot down the goals you want to achieve. Then decide the goal that you want to fulfil through this plan. Each goal will have a different timeline. They can be either long-term or short-term. Some of the goals you can achieve with these plans are
- Buying a house
- Buying a care
- Planning for child’s education
- Saving for retirement
Prioritize your goals and then choose a plan accordingly.
2. Availability of Pay-out Options
Different plans have different ways and structures of pay-outs. While some plans may allow only lump-sum withdrawals, others give you the flexibility to choose the nature of pay-out. Make sure that the monthly income plan you have chosen allows flexibility.
3. Potential of Wealth Generation
Before you select a plan, you need to ensure that it aligns with your goal.
Investment is done to achieve various goals throughout the lifetime. Consider the goal you are trying to achieve and whether the investment can create the corpus you need.
4. Tax Benefits Offered
This is one of the main factors that you should consider before buying any income plan. The best monthly income plans also help you to save taxes. Check that the plan you are buying is eligible for tax deductions and can enable you to save taxes.
For example, Invest 4G and iSelect Guaranteed Future by Canara HSBC Life Insurance are eligible for tax-benefits u/s 80C as well as section 10(10)D.
5. Risk Willingness of an Individual
Are you willing to take the risk? Or you are conservative and safety is your highest priority? You should assess your risk profile before venturing into any investment. If you like to take risks, you should go for monthly income schemes that have a larger equity component.
6. Current Financial Status
Assess your current financial status before investing. You need to ensure that you have enough income spare for investing regularly. See whether your investment will make a considerable dent in your family’s day-to-day expenses.
7. Cost of the Monthly Income Plan
To check if the monthly income plan is viable for you, you need to consider the cost of the plan. The cost of the plan should fit into your budget and should give a good return when you compare the ROI. That is, the cost that the plan will incur should not be more than the monthly payout that you will receive.
Ask questions relating to the direct cost to your insurer.
8. Check what your Income will be after Retirement
Monthly Income plans can be of great help when you look to supplement your income through them after retirement. After you retire, take into account all the income you are receiving. If the income from your PF is enough and you have a life cover, you may not need a high-income monthly investment plan. On the other hand, if income is not enough you should consider buying a better scheme.
What is the Best Time to Buy a Monthly Income Plan?
You may have heard a saying that ‘the best time to invest was yesterday, the next best time is today. The importance of making any investment at the right time cannot be overstated. This is even more important if you are looking to buy a Monthly Income Plan.
This plan does not have a specific time in which you should surely buy. However, you should make sure to purchase it early on in your life.
A major reason why you may look to make an investment in a monthly income plan is to ensure that you have a regular income by your side post you retire. That is, you stay independent even after retirement.
With the advancements in health and medicine sectors, the average life expectancy has certainly increased. Now you are likely to live more even after your retirement. Thus, you cannot leave it to chance.
The retirement age is usually between 60-65 in India. After retirement, you are likely to live till the age of 80-85, based on the current trends. This means that you have another 20 years. During this time, your income will not be there, but expenses will be increasing.
Here are some reasons why you may require an additional source of income is after retirement
a) To manage your daily expenses
b) To make sure you are not overly dependent on your children
c) To save money for an emergency
d) To keep up with health issues
Thus, to handle all these expenses and more, you need to have a big enough corpus. Bigger if we factor in the inflation rates.
The key to a big corpus is to invest in a monthly investment plan way before you retire and make regular contributions to it. The more time your retirement corpus has to grow before you retire, the better the value of your investment can be.
Tax Implications of Monthly Income Plans
Monthly Income Plans are majorly made up of Debt. More than 75% of a monthly income plan is made up of debt funds, the rest is equity. This heavy proportion of debt means that it is eligible to be taxed under the Income Tax Act 1961.
The gains you make through your plans are subject to be charged under long-term capital gain (LTCG) or short-term capital gain (STCG)
Here are the taxation rules
Case 1: If you hold your investment for less than 3 years, i.e., 36 months then you will be charged under the STCG tax. Short-term capital gain tax is added to your income.
The normal rate of taxation will be decided by the slab your income falls in.
For example, you purchased a debt-oriented monthly income plan on 1St April 2020 and sold it in December. It will then count as STCG.
Case 2: If you hold your monthly income plan investment for more than 3 years, then LTCG will be taxed. The current rate of long-term capital gains tax is set at 20%
**If you have a dividend-based monthly income plan, then no tax will be charged on the dividend that will be paid to you by the company.
Difference between Monthly Income Plans and Other fixed Investment Options
Monthly Income Plans are made up of two funds, Debt and Equity. Out of this more than 70-75% of the fund is debt-based while the remaining part is equity. These aim to pay out a regular return to you. Fixed Income investment options also provide you with regular returns, but in the case of fixed investments, you are assured of generating a fixed amount regularly.
There are other differences between Monthly Income Plans and Other fixed Investment Options. These are summarized for you in a table.
|Basis||Monthly Income Plans||Fixed Investment Options|
|Composition||Hybrid: MIPs are composed of both debt and Equity, with the major part being Debt||Fixed Investments generally are made of debt and government securities|
|Relation with Market||These are linked with the market performance||These funds are not linked with the market|
|Returns||Returns are not assured and may vary||Fixed returns are generated throughout the term|
|Risk Involved||Low to medium||No risk-low risk|
|Limits||No limit of investment||Some options do carry a fixed limit|
How can you Earn Regular Monthly Income through Mutual Funds?
When you look for investments that can fulfil your objective of providing regular incomes, fixed investments would surely come to mind. Fixed investments are mostly backed by the government and provide you with stable returns for your term.
But due to their extreme safety, the returns offered are average to say at best. So, is there any other option? The answer is yes. Monthly Income plans can provide you higher returns than their fixed counterparts.
The reason they were not preferred was that they couldn’t provide you safety and the returns are rather fluctuating. But with SWP this problem is solved.
Majority of the investors in monthly income schemes are retirees, homemakers, and those about to retire as per the depositories' data. Monthly income plans are for individuals looking to park their savings to get a regular income. Also, the first-time mutual fund investors can consider MIPs as the stepping-stone to experience the market.
A lot depends on the asset manager's expertise as the percentage of equity allocation is at his discretion. The fund manager selects the companies (large-cap, mid-cap, small-cap or micro-cap) to invest pooled investment, which helps manage risks. These funds are moderate-risk bets, and they mostly invest in debt securities such as debentures, public securities, and corporate bonds.
A monthly income scheme is a smart way to enjoy financial stability and security. Depending on the family’s needs and life goals, you may choose to opt for a monthly income plan or scheme. Although choosing the best monthly income scheme will provide future benefits to you and your family.