With the start of every financial year, people start exploring all the available tax-saving opportunities to avail deductions of up to Rs 1.50 lakh under Section 80C of the Income Tax Act, 1961. However, even with an early start, they somehow get stuck in the last-minute rush, which often results in investors making wrong decisions and choosing plans that may not be the best fit for them.
Sometimes investors also suffer because financial product distributors and agents — in a bid to maximize their commissions — sell products unfairly, and/or don’t really care to understand the needs of investors.
There have been a few instances in the past where relationship managers of reputed private sector banks have sold single premium guaranteed return schemes to senior citizens in the form of long-term fixed deposits (FDs) bundled with insurance. These types of acts affect the senior citizens’ financial wellbeing.
Serious about retirement planning? Avoid life insurance
Senior citizens looking for ways to save tax before the end of the financial year are advised to avoid any life insurance product. Life insurance is vital only in your accumulation phase. You are in the accumulation phase when you are the main earner, and you have responsibilities towards the dependent members of your family. However, when you are retired and a senior citizen, your duties are automatically transferred to dependents.
Your priorities during this stage of life will be capital security, regular income generation, and managing expenses related to healthcare and retirement. Thus, while searching for schemes to save tax, always keep these top priorities in mind to properly meet your liquidity requirements. You can go with plans either having a short lock-in period or with one that offers decent returns with regular returns.
Equity Linked Savings Scheme (ELSS)
If we take a look at tax-saving plans that are available for senior citizens, Equity Linked Savings Scheme (ELSS) — also known as tax-saving mutual funds — shines brighter with its least lock-in period of 3 years. ELSS also has the potential to offer good market-linked returns over the period of 3 years. Thus, you can choose an ELSS fund carefully after considering several quantitative and qualitative factors.
Compared to other fixed income tax-saving plans like National Savings Certificate (NSC), tax-saver bank FD, Public Provident Fund, etc, ELSS has the potential to yield better market-linked returns in 3 years. However, a retiree should avoid the Systematic Investment Plan (SIP) way to invest in ELSS, because each of your SIP installments will be subject to a lock-in period of three years. Instead, consider making a lump sum investment in ELSS.
When the lock-in period in ELSS is complete, the amount can be withdrawn via the Systematic Withdrawal Plan (SWP). This is a facility offered by mutual fund houses, which generates a cash inflow stream to meet retirement expenses.
Apart from ELSS, having investment in 5-year Tax-saver Bank FD as well as in Senior Citizen Savings Scheme (SCSS) will also be a great option for stability and diversification purposes. Tax-saving FDs cannot be prematurely encashed before completion of at least 5 years from the date of receipt. But this lock-in is good in a way to keep the funds safe and stable.
In Tax Saver FD you can invest a minimum amount of Rs 100 or its multiples, with a maximum limit of Rs 1.50 lakh in a financial year. The noticeable thing is that the interest rate varies among banks.
A retiree can consider the Quarterly Interest Payout Plan or Monthly Interest Payout Plan as per liquidity needs and fund retirement expenses. The deposit can be made in one name or jointly, but the noticeable thing is that, if it is held in a joint holding, the section 80C deduction benefit is available only to the first holder who has a PAN (Permanent Account Number).
Senior Citizen Savings Scheme (SCSS)
Similarly, the Senior Citizen Savings Scheme (SCSS) is also a good tax-saving option for retirees. It is government-backed, and specifically designed for the empowerment and financial security of senior citizens. Additionally, it offers an interest rate of 7.40% per annum. It can be opened in an individual capacity or jointly with your spouse. The nomination facility is available before and after opening the account.
The maximum lump sum deposit allowed under SCSS is Rs 15 lakh and the minimum is Rs 1,000. It is also eligible for deduction up to Rs 1.50 lakh per annum under section 80C and interest earned under SCSS is payable on a quarterly basis and is exercisable from the date of deposition till March 31st / June 30th / September 30th / December 31st. However, make sure to claim the interest on time to earn extra.
While the interest earned is taxable, interest earned on bank deposits is exempt up to Rs 50,000 annually, as per the provisions of section 80 TTB. For senior citizens aged between 60 and 80 years, the exemption limit is Rs 3 lakh, and for over 80 years it is Rs 5 lakh.
Union Budget 2021 & Health Insurance
Citizens aged 75 years and above don’t have to file their income tax return after the Union Budget 2021 if pension and interest income is their only source of annual income. For a better tax-saving portfolio, you can follow 80:20 or 75:25 allocation to ELSS and the non-market linked tax-saving plans.
You can also take a health insurance cover. Meanwhile, if there are certain diseases and disorders, you can avail a deduction of Section 80DDB of Rs 1 lakh or the actual amount spent, whichever is less. Similarly, for those who are engaged in charity, can avail deduction under section 80G of the Income Tax Act, 1961. Thus, plan your tax-saving investment wisely.
It’s a very thoughtful process to choose your retirement plans and for senior citizens, it should be a very serious decision, as it is very important for the life coming ahead.
(By Amit Gupta, Co-Founder and MD, SAG Infotech)