Senior citizens are having a tough time on the tax front. They had many expectations from the budget, but, very few positive changes were announced. Lets analyse some of the changes and how senior citizens can tackle them.
The first change is the rise in basic exemption limit by Rs 10,000 to Rs 1,95,000, which will result in a tax-saving of Rs 2,000, excluding cess. A point to note is that the first rate of tax applicable for senior citizens is 20%; they cant make use of the 10% slab on taxable income.
Further, additional education cess of 1% will eat into the tax benefit provided by the higher basic exemption limit. However, the good news is that till a level of Rs 8,94,000 of taxable income, there will be some tax-saving in the current year. The difference will decrease as the income increases, and may ultimately be just a few hundred rupees.
The small savings in terms of tax will have to be countered with a fall in the cash flow for several individuals. In terms of investment, senior citizens will face a serious problem because theyll find it tough to escape from tax deduction at source (TDS).
There are three main debt instruments that senior citizens invest in and TDS is now applicable on all of them. The first is the senior citizens savings scheme (SCSS), where tax is deducted at source each quarter when the payment is made. The 9% rate payable quarterly on these deposits is still a huge draw. Many individuals have already invested in SCSS; hence, they may be unable to escape from TDS.
The second impact will be felt on the 8% taxable Government of India (GoI) bonds. There was no TDS on these instruments earlier, but this has changed now. The new requirements state that tax will be deducted at source when the amount invested in GoI bonds crosses Rs 1,25,000.
Thirdly, in the case of bank fixed deposits too, the amount of interest over which TDS will be applicable is Rs 10,000. This means that if the interest rate is 9% per annum, TDS will be applicable after an investment of Rs 1.11 lakh. If the interest rate is 10% p.a., the threshold investment amount above which TDS will be applicable is Rs 1 lakh.
Hence, individuals will not be able to escape from the TDS net if they have some taxable income in their books. Meanwhile, the minimum age for an individual to be classified as a senior citizen remains at 65 years.
So, how can senior citizens construct their portfolio in such a situation? The best way is to ensure that they earn a high rate of return by investing for a longer time period, say three to five years.
They should select the option that gives them the required benefit, possibly by using bank fixed deposits. Making use of the additional returns for senior citizens will help them in their efforts. The next option is to look at SCSS.