Srikala Bhashyam is the Managing Partner of RS Consultants. She runs an investment-consulting firm in Bangalore to provide consultancy in the areas of financial planning and media. In the last 15 years, she has worked with top publications in different locations. The primary focus of all her columns is to simplify the nuisances of Finance, which has attained a new look over the years. Besides being a columnist, Srikala has also been closely associated with some of the prestigious book projects.
For some reason, the tax planning exercise is associated with a young professional who is struggling to find ways to understand tax implications on his income. Even the advertisements or promos of tax planning have a yuppie professional with least knowledgeable look of tax planning! In these days of good pension and decent rental income, Tax planning is not the monopoly of the young. Even seniors have to worry about their tax saving strategies.
Buying insurance to save tax?
The definition of senior citizen itself has different criteria for different things. For instance, for the purposes of IT Act, a senior citizen is one who has completed 65 years of age. On the other hand, for investments in bank deposits or senior citizen schemes, even the age of 60 is good enough to be a senior. So, an investor in the age group of 62 may have invested in a senior citizen scheme but for the purposes of income tax will be clubbed under normal category. That would mean a tax free income of only Rs 1.5 lakh as against Rs 2.25 lakh, enjoyed by senior citizens. Hence, Tax planning becomes a necessity even after retirement.
Tax saving: One-time investment options!
However, the tax saving strategy needs to be more careful for seniors as they dont have the luxury of income years. While the investment in itself needs to be tax efficient, one cannot avoid tax liability completely. While there is a distinction in the income slab for different categories of individuals, the I-T Act does not differentiate when it comes to Tax planning options.
Tax planning: Get your SIP strategy right
In fact, the complete gamut of tax saving instruments is available even to senior citizens. However, some of these options may be irrelevant for senior citizens. So, pick your Tax planning product carefully.
Make your home loan the tax saver
Low risk and capital protection: While the basic investment strategy for senior citizens needs to revolve around tax efficiency, one cannot avoid the tax component completely. For instance, the rental income is a taxable component and so is the interest income. So, those who are required to do Tax planning to avoid tax liability can look for products which ensure returns, besides protecting the corpus. Products such as fixed deposits, post office term deposits and NSCs can be the preferred choice over Market-linked products such as ELSS.
Tips for choosing tax-planning instruments
While ELSS has a much lower lock-in period when compared to other options, it carries the risk of capital reduction. Even if an investor has the risk appetite for Equity, opt for dividend plan as it ensures cash flow which is tax free.
Tax planning: Choose safe Equity options
Choose the right product: Selection of the right product is more crucial for a senior citizen simply because he doesnt have the luxury of time on hand. Recently, I was told that a 63-year old was sold a pension plan when he walked into his bank for investing in a deposit. The investor did not realise that he was required to make annual premium for the next 10 years till he received the document! In this era of tough Market conditions, investors are easy target for wrong selling.
How to minimise your tax outgo
As an investor, make sure to understand the features of the product you invest in. Avoid it even if it has the potential to offer fabulous returns.
Plan the cash flow for tax planning: Investing in Tax planning gets a lot easier when you are better prepared more so with respect to senior citizens as they have the constraints of limited cash flow. If the annual income is well above the tax free limit, make it a habit to set aside a portion of income for investing in tax saving instrument.
The product could be a recurring deposit with a bank or cash management funds of mutual funds which tend to offer slightly better returns than recurring deposits. At the end of the year, the accumulated sum can be used to invest in Tax planning instrument of your choice.