Post Retirement Financial Planning in new Tax Regime

In every working individual’s life, there comes a time when s/he doesn’t need to bother about waking up early in the morning, getting ready for the office, and rush through the mad crowd to reach office on time. This is the time when you have retired and you are surviving on the retirement corpus which you have built up over the years through various investment instruments like provident fund, pensions in case you are entitled to, and other savings etc. But can you relax looking at the retirement corpus believing that your days of financial planning are over? The answer is no. Because retirement doesn’t mean your tax troubles are over and you may still have to pay large amount as tax if you do not invest your lump sum money in the right products. Tax is also payable on income from property (rent), capital gains (long term and short term), and dividend and interest from fixed income investment.

So, retirement corpus comprising pension fund, provident fund and other savings must be invested in the right place and right products which could give returns that are higher than inflation and minimize the amount that you have to pay as tax. This is why; post retirement financial planning becomes important. Before we look at the investment opportunities let’s have a look on the new tax slab

 

For Indian Resident

Age group 60-80 Age group >80
Up to Rs. 3,00,000 Nil Up to Rs. 5,00,000 Nil
Rs. 3,00,001 to Rs. 5,00,000 10% of the amount by which the total income exceeds Rs. 3,00,000/- Less : Tax Credit – 10% of taxable income up to a maximum of Rs. 2000/- Rs. 5,00,001 to Rs. 10,00,000 20% of the amount by which the total income exceeds Rs. 5, 00,000/-.
Rs. 5,00,001 to Rs.10,00,000 Rs. 20,000/- + 20% of the amount by which the total income exceeds Rs. 5,00,000/- Above Rs. 10,00,000 Rs. 100,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-
Above Rs. 10,00,000 Rs. 120,000/- + 30% of the amount by which the total income exceeds Rs. 10, 00,000/-.
Surcharge: 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education Cess : 3% of the total of Income Tax and Surcharge

 

The investment limit under Section 80C was raised by Rs 50,000 to Rs 1.5 lakh in options like PPF, ELSS and small-savings instruments. The deduction limit of interest on loan of self-occupied residential property was also hiked to Rs 2 lakhs from earlier Rs 1.5 lakh the long-term capital gains tax from 10 percent to 20 percent on transfer of mutual fund units

Besides traditional pension plans, gratuity and PF, there are many investment instruments available for senior citizens, which carry no risk, and are tax efficient too. Let’s have a brief look at some of these:

Available Investment Instruments

Instrument Returns Compunding Maturity Tax Benefit Premature Withdrawal Other Features
POMS( Post Office Monthly Interest Scheme) 8.5 % per annum paid monthly annually 5 years No Yes Minimum investment is Rs 1500 and maximum is Rs 4.5 Lakhs for single account and Rs 9 Lakh for joint account; no default risk
SCSS( Senior Citizens Savings Scheme) 9.20% Quarterly 5 Years Interest Taxable Yes after 1 year No Loan Scheme
PPF 8-9 % Annually 15 Years Tax-free Yes, from 6th Year Loan Scheme from 3rd Year to 6th Year
NSC 8.5-8.8% Half- Yearly 6 Years Interest Taxable Yes, for specific purpose Loan Scheme
Bank Fixed Deposit Greater than Saving Account and an extra 0.5 % Yearly 15 days to 5 years and above Interest Taxable Yes High Rate of Interest than conventional Saving Accounts


Equity/Equity Mutual funds:

Considering the government has proposed to raise long-term capital gains tax on debt- oriented mutual funds to 20% from the existing 10%, to bring parity with banks and other debt instruments with increase in period of holding from 12 to 36 months. It would be wise to maintain a small part of corpus in stocks. Though investment in stock is risky and one should avoid over exposure to stock post-retirement but considering the need for generating inflation adjusted positive return, one needs to maintain a small part of the corpus as part of the portfolio to generate inflation adjusted positive returns.

Equity oriented Hybrid Funds:

If someone doesn’t want to take risk by investing in stocks. He can invest in Equity hybrid funds which are comparatively safer than stocks as 35% of the money is invested in government and corporate bonds. Debt hybrid funds invest at least 75 % funds in debt and the rest in equity.

Considering high inflation and rising medical costs, and increased taxation, investment in equity is the only way out to get inflation adjusted positive return. However, risk can be minimized by maintaining a small part of the post retirement corpus and choosing less risky funds.

References :  www.incometaxindiapr.gov.in and http://finotax.com/income-tax/slabs-prop

July 29, 2014 |Manish Kumar | T A Pai Management Institute, Manipal

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