Retirement planning continues even post retirement.
A lot of people spend their adult lives working and saving to prepare for retirement. But once you hang up your hat, you should not necessarily stop thinking about saving and investing.
What do you do with all the money you have got at retirement? Collecting your pension and provident fund money is work half-done. You must plan meticulously to not only make your money yield returns that are higher than inflation but also minimise the amount you have to pay as tax. This requires a thought out retirement planning.
The question of what retirees should invest in, though, is not necessarily simple to answer. However, there are several possible investments and strategies that retirees can use to help extend their savings and allow them to enjoy their retirement and maintain their lifestyle. So it is about making the best use of the retirement planning corpus that has been created over the years. It is crucial to keep:
- The tax liability at bay
- provide a regular stream of income
- and not outlive the corpus till the age of life expectancy
Also let us look at some post retirement planning investments options in India which strike that perfect balance between risk and returns. Subsequently based on the risk appetite of investor we have classified the various investment options:
Especially for conservative investors, who need fixed interest income at regular intervals it is best to invest in a mix of pure debt options as follows. There is negligible credit risk and zero interest rate risk involved in these options.
|Risk Appetite – Conservative|
|Bank FD||Company FD||Post Office Monthly Scheme||Senior Citizen Saving Scheme|
|Interest Rate Risk||Nil||Nil||Nil||Nil|
|Credit Risk||Subject to credit risk of Bank||Subject to credit risk of Issuer||Negligible (Sovereign)||Negligible (Sovereign)|
|Tenor||1 year – 15 years||3 years – 10 years||5 years||5 years|
|Taxation||Interest income taxed as per slab||Interest income taxed as per slab||Interest income taxed as per slab||Interest income taxed as per slab|
|Tax Benefit under 80C||Yes (5 years and more tenor)||No||No||Yes|
1. Bank & Company Fixed Deposits
Senior citizens get higher interest rates than ordinary customers on bank fixed deposits and recurring deposits, typically 0.5% higher than normal rates. According to Section 80 TTB of the Income Tax Act 1961, the Interest income up to Rs 50,000 per annum is tax-free for senior citizens. This includes interest on bank FDs, bank RDs, post office FDs, post office RDs and savings account.
Unlike bank deposits, your savings can be put to excellent use by investing in the regular company fixed deposits. Besides these offer immense growth to your money over the tenor and deliver fixed periodical interest payments. FD interest rates for senior citizens is generally higher.
2. Senior Citizen Savings Scheme
Unquestionably the first choice of most retirees, the Senior Citizens’ Saving Scheme (SCSS) is a must-have in their investment portfolios. As the name suggests, the scheme is available only to senior citizens or early retirees. In addition, SCSS can be availed from a post office or a bank by anyone above 60. Early retirees can invest in SCSS, provided they do so within three months of receiving their retirement funds. SCSS has a five-year tenure, which can be further extended by three years once the scheme matures.
In the same way the interest rate is declared by the Government periodically. Interest is payable quarterly and fully taxable. However the rates are set each quarter and linked to the G-sec rates with a spread of 100 basis points. Once invested, the rates remain fixed for the entire tenure. Following, SCSS offers the highest post-tax returns among all comparable fixed income taxable products. The upper investment limit is Rs 15 lakh and one may open more than one account. The capital invested and the interest payout is evidently an assured has sovereign guarantee. What’s more, investment in SCSS is eligible for tax benefits under Section 80C and the scheme also allows premature withdrawals.
3. Post Office Monthly Income Scheme
Post Office Monthly Income Scheme (POMIS) is also one of the best government-backed saving schemes which allows the investors to save a specific amount every month. Subsequently, interest is added to this investment at the applicable rate and paid out to the depositor(s) monthly.
This scheme is especially formulated for the investors looking for a fixed monthly income generating option but are reluctant to take any market risks. Hence, it is more favourable for retired individuals or senior citizens who have landed into the no-more-pay check zone. There is no capping on the no. of accounts which can be held by individuals but there is a limit on the maximum amount that can be cumulatively invested across all POMIS accounts. In case of sole operated account, maximum investment allowed in POMIS is Rs. 4.5 lakhs. In case of joint holders (up to 3 joint holders), maximum of Rs.9 lakhs can be invested.
For the next category, which is investors with a moderate risk appetite, one can look at some debt options which yield higher returns but carry some credit risk and interest rate risk. Also, one can explore hybrid options like balanced funds which invest in a mix of debt and equity.
|Risk Appetite – Moderate|
|Debt Mutual Funds||Balanced Fund||Housing & Real Estate||National Pension System|
|Interest Rate Risk||Low to High(depends on the category of debt fund)||Moderate (since balanced funds have ~40% exposure to debt)||Nil||Low to High (depends on the debt allocation)|
|Market Risk||Nil||Yes (depends on the equity allocation)||Nil||Yes (depends on the equity allocation)|
|Credit Risk||Low to High(depends on the category of debt fund)||Moderate (since balanced funds have ~40% exposure to debt)||Nil||Low to High (depends on the debt allocation)|
|Tenor||No minimum tenor||No minimum tenor||No minimum tenor||Matures at the age of 65-70|
|Taxation||Cap gains < 3 Year – Marginal rate of taxCap gains > 3 years – 20% after indexation||Cap gains < 1 Year – 15%Cap gains > 1 years – 10%||Rental income taxed as per slab||On maturity, 60% of the corpus is tax free|
|Tax Benefit under 80C||No||No||No||Yes|
4. Debt Mutual Funds
Debt MFs can also be a part of a retiree’s portfolio. Taxation of debt funds makes it a better choice over bank deposits, especially for those in the highest tax bracket. While interest on bank deposits is fully taxable as per the tax bracket (30.9 per cent for highest slab), income from debt funds gets taxed at 20 per cent after indexation, if held for three years or more irrespective of the tax bracket.
A retiree can consider keeping a significant portion in debt funds also because it is more liquid. Hence this is great option for retirement planning.
5. Balanced Mutual Funds
Balanced funds, or equity-oriented hybrid funds, are safer than stocks/equity mutual funds as they invest up to 35 per cent assets in government and corporate bonds. They are safer than pure-equity funds but are taxed like them- 10% tax on long-term capital gains and dividends.
Balanced funds have been able to generate double-digit returns over the years despite exposure to low-return debt securities.
You can use these funds for long term income generation without paying very high tax.
6. Housing & Real Estate
Not to mention, the demand for real estate and housing is constantly on the rise, enhanced by growing population of India. This means that once you invest in real estate, your investment tends to grow in value over time. However, it is important to invest in areas that have a high demand and high prices. This option can be a good source of monthly income additionally, if you decide to put a commercial or housing property on rent.
Additionally rental income is added to your income and is taxed as per the tax slab you fall in.
7. National Pension Scheme
NPS has an age eligibility from 18 to 65 which means that senior citizens can also invest in it. Once an NPS account is opened, it can be extended all the way to the age of 70.
Investment in NPS is eligible for tax deduction up to Rs 1.5 lakh under Section 80C coupled with up to an additional Rs 50,000 under Section 80CCD(1B). Furthermore NPS money is invested in equity and debt funds as per the investor’s choice and generate returns. There is thus no fixed interest rate on NPS but the money in it can grow much faster through equity investment.
ALso on maturity, 60% of the NPS corpus is tax free. The balance 40% of the NPS corpus must be used to buy an annuity (monthly pension).
For the last category, which is investors with a high-risk appetite, one can look at some pure equity options which carry significant market risk. Depending on the risk profile, one may allocate a certain percentage into equity mutual funds (MFs) with further diversification across large-cap and balanced funds with some exposure even in monthly income plans (MIPs). Moreover retirees would be advised to stay away from thematic and sectoral funds, including mid and small caps. The idea is to generate stable returns rather than focus on high but volatile returns.
Equity Mutual Funds
Mutual Funds can bring an element of growth and wealth creation in the portfolio of a senior citizens. There are retirement planning options offered by mutual funds. However, these plans are little more than marketing gimmicks. Instead, senior citizens can achieve high investment returns by investing in mutual funds of a general nature. Among equity funds, large cap funds are relatively low risk while mid and small cap funds are high-risk high return. However, one must avoid over-exposure to stocks after retirement because they are risky.
But given the need for generating returns higher than inflation so that you can maintain your present lifestyle in the future, stocks must be a part of your portfolio.
Equity mutual funds held for longer than 1 year are taxed at just 10%. If held for less than 1 year, they are taxed at 15%.
All the investment options and retirement planning that we discussed undoubtedly are designed to help individuals get a sizeable return on their investment post-retirement. The last thing that older investors will get is the financial worry as a well-designed portfolio can make it risk-free. Also, the Government is trying its best to provide these schemes online so that these products can be availed even during a health crisis like Covid-19.