After retirement, T.A.A. Hakeem, a 62-year-old from Kerala, spends his time looking after his family and taking care of matters that he did not have time for earlier. He is a former police commissioner.
For Hakeem tax saving happens largely through insurance policies. “Apart from my pension, I have insurance. In buying a life insurance policy, I also enjoy deduction benefit to reduce my tax burden,” he says. At the moment he is invested in a life insurance product that he bought before retirement. That is his only investment. “The insurance product is a seven-year one, which will mature in 2016. When that comes, I will then decide, depending on market conditions, which instrument to invest in next,” he says.
If you are above 60 years of age, your income is exempt from income-tax up to a maximum of Rs.2.5 lakh. For a super senior citizen, individuals who are 80 years old or above, this exemption limit is Rs.5 lakh. Only if your income is above the threshold will you need to make use of the deductions to lower your tax liability.
For a retired person, there are three goals that need to be in focus: a regular stream of income, investments to last for a lifetime and insurance against medical emergencies. Life insurance is required only if there are dependants; in Hakeem’s case, his wife is dependant on him. But since his policy is not a pure term plan, it may not be enough. Again Mint Money advises to put your financial planning needs first. Keeping these three goals in mind here is a list of tax savers that you can make use of.
Life insurance: The primary purpose of life insurance is to provide for your loved ones in case you die. But if you are above 60 years of age there is less likelihood of having dependants. Plus, by now you would have paid off all your big-ticket dues such as a home loan. Insurance policies can be bought till 60-65 years of age and most of them mature by the age of 70-75 years. But just because they are available, you need not buy insurance unless you need it.
Health insurance: But what is true of life is not true of health. You need health insurance at all times. The premiums that you pay as a senior citizen qualifies for a deduction of Rs.20,000. However, you need to be careful in selecting your health insurance.
Look for a policy that can be renewed for lifetime. Also, there are fewer options for senior citizens above 65 years of age who are buying a policy for the first time. Moreover, most policies have a co-payment clause, which means you need to pay a part of the bills. Choose a policy with minimum sub-limits on the insurance cover.
“Insurers would ask senior citizens to go for health check-ups before insuring them. I recommend they go for medical tests when they are relatively in good health. They should also ensure they are relaxed when the tests are conducted. A simple thing like reaching the laboratory before the scheduled time and relaxing can help getting accurate results in the diagnostic reports,” says Mahavir Chopra, head, e-business and personal lines, Medimanage.com, a health insurance portal.
The next big planning is required in the way you invest your money. Two things are essential: you churn your corpus into a regular income-generating vehicle and you invest a part of that corpus to stay afloat the inflationary tides. To achieve the first you could choose from the following tax savers.
Regular income stream: Senior Citizen Savings Scheme (SCSS) is a post office savings scheme, which is a highly recommended product by financial planners. It qualifies for a deduction under section 80C but the interest it earns is taxable. SCSS now is market linked but since it calls for a one-time investment, you lock into the rate for the entire tenor. Currently SCSS is giving a rate of 9.3% per annum. The interest income is paid quarterly but is taxable.
The scheme is available for five years and you have the option to extend it by another three years. The maximum you can invest in SCSS is Rs.15 lakh. “The scheme is backed by the government, so it is essentially one of the safest investment instruments from the capital protection perspective which is essential during the post-retirement phase,” says Nitin B. Vyakaranam, founder and chief executive officer, Artha Yantra, a financial planning portal.
But before you exhaust your investment in SCSS, do a quick comparison with tax-saving fixed deposit (FD) rates of banks. Usually in a high interest rate regime, FDs are capable of offering better returns and you can withdraw the interest for a regular income stream.
Investment for future: Remember your investments pay you interest to cater for a regular income stream, so at the end of the tenor what you get back is the principal. That principal will fetch you less than what it could, say, some five years back. That is because inflation eats into the value of your money. Therefore, we recommend that you don’t put the entire corpus into income generating vehicles. Assess your income gap and use income generating products to fill that.
Use the remaining corpus to build an investment portfolio. To begin with, you need an asset allocation first. “It is important to keep one’s income ahead of inflation and that is true for senior citizens as well. In order to do that, I recommend an asset allocation of 75% in debt products and 25% in equity. But this asset allocation will change depending upon one’s asset liability valuation,” says Pankaj Mathpal, a Mumbai-based financial planner.
For instance, if you are supported by regular income such as pension or rental income, you can increase your equity allocation. Debt products will ensure capital protection, while equity products will offer a kicker to your overall portfolio to ensure increasing income needs are met as inflation catches up.
In debt products, tax-saving FDs are a good bet. Financial planners recommend products that do not have long lock-ins. “I wouldn’t recommend a senior citizen to open a PPF. If there is a PPF already maintained by the individual then he should extend it by five years. He can withdraw up to 60% of corpus in the beginning of this extension. But opening a fresh account unless he has a protected source of income and emergency fund is not advisable,” says Mathpal.
You could also look at National Savings Certificate (NSC). NSCs are now available for five years and 10 years. The interest that accrues every year but gets reinvested also qualifies for a tax deduction under section 80C. However, the interest is taxable. NSCs, too, are market linked. For this year, the five-year NSC is offering a rate of 8.6% and 10-year NSC is offering 8.9%. But again, a 10-year NSC will work only if you have a protected source of income.
For the equity portion, you should consider equity-linked savings schemes (ELSS). They offers a deduction of up to Rs.1 lakh under section 80C.
However, planners do not favour the newly notified Rajiv Gandhi Equity Savings Scheme (RGESS) that allows an extra deduction of Rs.25,000. “RGESS is for people who earn less than Rs.10 lakh and who want to invest in equity over and above the section 80C limit. The amount of tax saved is just Rs.5,000, so the case is weak. For income below Rs.5 lakh, it may not make much sense as the savings would be Rs.2,500 on an investment of Rs.50,000,” says Suresh Sadagopan, a Mumbai-based financial planner.
Tania Kishore Jaleel contributed to this story.