Tuesday, February 19, 2019

How to Protect your Retirement Funds from Tax?

by Editor (editor), , July 21, 2018

Here are ways in which you can reduce or negate your tax liability and protect your retirement funds.

Most working people look forward to a retired life that is peaceful and relaxing, free from any financial worry. There are several investment options available to a senior citizen, that offer reasonable returns and tax advantages.

For a senior citizen, the safety of his/her investments is a critical factor. Here are ways in which you can reduce or negate your tax liability and protect your retirement funds.

Commuting the Corpus

Government employees who are retiring can avoid taxes by withdrawing one-third of their retirement corpus (also called commuting). Non-government employees who commute their pension amount will get tax relief on one-third of the commuted amount, if they have received gratuity. Half the commuted pension will become tax-free if they have not received gratuity. The monthly pension that a pensioner receives, however, is taxable.

Understanding your Income tax Liability

A senior citizen has no active income since he has stopped working. However, he may have income in the form of rent from properties owned, long term and short-term capital gains from various investments and interests and dividends from fixed-income instruments. Any income above Rs.3 lakhs would be taxable at the hands of the senior citizen (60- 80 years old). For a very senior citizen (above 80) income above Rs.5 lakhs would be taxable.

Investment Avenues

There are various avenues that a senior citizen can look at by way of investment. Equity mutual funds have lost much of their sheen because of the re-introduction of long term capital gains tax. Besides, such investments would expose the investor to the volatilities of the market. Though debt funds are a safer option in terms of risk exposure, such funds also entail capital gains tax at the time of redemption.

Though government bonds are non-taxable at maturity, the returns are low at 5% and there is a lock in of 5 years. While PPFs offer tax breaks at maturity with good returns (8.5-9%), the lock-in of 15 years can be a deterring factor.

Fixed deposits with Tax Benefits

A fixed deposit is the most preferred investment option for most senior citizens. Fixed deposits for senior citizens offer a very attractive interest rate of 4.5 to 8% depending on the tenor of the deposit. The tenor ranges from 7 days to 10 years. There are tax-saving fixed deposits that generally come with tenor of 5 years and above. The amount that you invest under such schemes is eligible for tax deduction under Section 80 C. By submitting Form 15G and Form 15H tax can be saved on income of Rs. 10,000 or above so investor can maximize their earnings.

Though the interest on FDs are taxable, the Government has enhanced the exemption limit for senior citizens to Rs.50,000. You also have the option of interest payout to your savings account on a monthly or quarterly basis. This can be a supplementary income to the depositor. FDs for senior citizens also come with the flexibility of premature closure even though this may jeopardise the tax benefit that you may otherwise get.

NBFCs offer one of the highest interest rates to senior citizens FD, of up to 8.75%. It offers the convenience of an online FD calculator that helps you choose the amount and tenor that is most suitable to you. You can also manage your FDs online.

Considering the higher returns, tax advantages, liquidity and the safety of your money, fixed deposits come out as the best and safest investment option for senior citizens.

About the Writer

Editor is an editor for BrooWaha. For more information, visit the writer's website.
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