Ankur Kapur
Finqa.in
Section 80C of the Income Tax Act allows investors to claim deductions from their taxable income by investing in certain investments. Efficient tax planning enables investors irrespective of the age of the investor to reduce tax liability, while ensuring that the investments are in line with the investor's long term goals.
A retired individual would typically evaluate their choice from the perspective of risk and time horizon. Retired person would be more inclined towards a traditional tax-saving instrument such as Public Provident Fund (PPF), National Savings Certificate (NSC), Post office time deposit (POTD), bank deposit and the like. However, a small portion may also be allocated towards Equity Linked Savings Scheme (ELSS) to provide growth.
While the first three are government saving schemes, where both the return as well as capital is guaranteed by the Government of India, a term deposit offered by a bank is also considered a reasonably secured investment. However, the returns of ELSS are subject to market price risk, which implies that returns are linked to performance of the stocks held by the mutual fund scheme. Here is an overview of each option.
Public Provident Fund
PPF is a 15-year deposit account that can be opened with a designated bank or a post office. The account can be closed in the 16th financial year or continued with or without additional subscription, for further blocks of 5 years. PPF enjoys an exempt-exempt-exempt (EEE) status, where withdrawals are also not taxed. PPF is quite attractive because of exempt-exempt-exempt (EEE) status. For a retired person, PPF may be suitable only if PPF account is maintained for atleast 10 years. Additionally, PPF rate of interest is also decided by the Government and is directly linked with the interest rate environment in the country. Therefore, investments in PPF do not grow on a real term basis.
Current rate of interest: 8.70% p.a. (after tax)
National Savings Certificate (NSC)
NSCs are like bonds, issued by the government for a specific period, and pay interest. They can be bought from a post office and are usually held until maturity. Accrued interest is taxable, but is deemed to be reinvested and therefore eligible for Section 80C benefits. NSCs are not very attractive investment because the interest you earn on NSC is taxable. PPF is a tax efficient instrument in comparison with NSC.
Current rate of interest: 8.68% p.a. (before tax)
Post Office Senior Citizens' Scheme
One can invest a maximum of Rs15 lakh under this scheme. Interest is paid out quarterly. Contributions to this scheme are eligible for tax benefit under Section 80C up to the ceiling of Rs 1.5 lakh. The term of the deposit is five years. On maturity, one can extend the period of investment by another three years. Monthly Income Scheme (MIS) and Senior Citizen Saving Scheme (SCSS) are good options for Senior Citizens who desire monthly/quarterly interest. Note that interest income from the Post Office Senior Citizen Savings Scheme is taxable.
Current rate of interest: 9.20% p.a. (before tax)
Bank deposits
In fixed deposits, banks offer 0.25 to 0.5-percentage point higher rates for senior citizens. One can opt to receive interest either monthly or quarterly. Note that interest income from bank FDs is taxable.
Current rate of interest: ~9.25% p.a. (before tax)
Equity linked savings schemes (ELSS)
ELSS is a special category of diversified equity mutual funds. Investments in ELSS are subject to a 3-year lock-in. The lock-in period will apply from the date of purchase of units. Investments in ELSS are market linked and can provide growth to a portfolio over a long term. At the time of maturity returns are tax free. Retired individuals may invest some portion of their tax saving investments in ELSS.
Average last 3 years return: ~30 % p.a. (after tax)
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