Why Senior Citizens Need To Choose Their Tax-Saving Avenues Thoughtfully

Feb 24, 2021

Around this time of the year, taxpayers start exploring various tax-saving avenues to avail a deduction of up to Rs 1.50 lakh under Section 80C of the Income Tax Act, 1961. However, the last-minute rush often results in investors choosing tax-saving investment avenues that may not be best suited for them.

Financial product distributors and agents, in an attempt to maximize their commissions, many a times also mis-sell products and/or do not really care to understand the investor's need. And ultimately, it is the investors who suffer.

There have been instances in the past wherein relationship managers of reputed private sector banks have sold single premium guaranteed return plans as long-term Fixed Deposits (FDs) bundled with insurance to senior citizens. Such instances wreak havoc on senior citizens' financial wellbeing.

If you are a senior citizen looking for tax savings avenues before the financial year draws to a close, first say no to life insurance products. Life insurance is required only when you are in the accumulation phase, and as a breadwinner, you have responsibilities towards dependent family members. When you are a retiree and senior citizen, you have discharged most of your duties towards dependants. Your priorities during the autumn years of life mostly are...

• Capital protection
• Generation of regular income
• Managing healthcare and retirement-related expenses well

Therefore, while exploring tax-saving avenues, you must keep in mind these top three priorities whereby your liquidity needs are well-addressed. Ideally, choose amongst tax-saving avenues that have a lower lock-in period and the ones offering a decent return potential with regular returns.

Table 1: Tax-saving avenues with return potential v/s lock-in period

Among the tax-saving avenues that are available for senior citizens to invest, Equity Linked Savings Scheme (ELSS), also known as tax-saving mutual funds, have the least lock-in period of 3 years and hold the potential to offer decent market-linked returns over 3 years---provided you choose the ELSS funds carefully after considering a host of quantitative and qualitative factors.

To learn more about ELSS and how to select the best ELSS funds for your tax-saving portfolio, I recommend that you download and read PersonalFN's Money Simplified Guide: Your Definitive Guide to Select ELSS. It is a free guide that will help you learn what is ELSS; why ELSS is a worthy option; the mistake to avoid while investing in ELSS; how to select the best ELSS funds; how ELSS as a mutual fund category has performed; which are the best ELSS funds to invest in, and much more!

In comparison to other fixed income tax-saving avenues such as National Savings Certificate (NSC), Tax-saver Bank FD, Public Provident Fund, etc., ELSS holds the potential to reap better market-linked returns over 3 years.

Having said that, as a retiree, as far as possible avoid taking the Systematic Investment Plan (SIP) route to invest in ELSS; because your every SIP instalment will be subject to a three-year lock-in period. Therefore, consider investing a lump sum in ELSS.

Once the lock-in period in ELSS ends, the accumulated money can be withdrawn systematically via the Systematic Withdrawal Plan (SWP), a facility offered by mutual fund houses, to generate a cash inflow stream to meet retirement expenses.

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Apart from ELSS, for the required stability of your tax-saving portfolio and diversification standpoint, also hold some of the traditional investments such as a 5-year Tax-saver Bank FD and the Senior Citizen Savings Scheme (SCSS).

A tax-saver FD cannot be prematurely encashed/liquidated/withdrawn before the completion of a minimum of 5 years from the date of receipt. But this lock-in, in a way, is good to compound wealth safely and steadily.

The minimum amount you can invest in tax saver FDs is Rs 100 or in multiples thereof, with an upper limit of Rs 1.50 lakh in a financial year. Please note that the rate of interest varies across banks.

Ideally, to address your liquidity needs and fund retirement expenses, consider the Quarterly Interest Payout Plan or Monthly Interest Payout Plan. The deposits can be held in a single name or jointly, but keep in mind that in the case of joint holdings, the Section 80C deduction benefit is available only to the first holder who should be a PAN (Permanent Account Number) holder.

Similarly, the Senior Citizen Savings Scheme (SCSS) is also a sensible proposition for retirees. SCSS is a government-backed savings scheme designed for the empowerment and financial security of senior citizens and currently offers interest @7.40% per annum.

The SCSS account can be opened in an individual capacity or jointly with your spouse (husband/wife). The nomination facility is available at the time of opening and also after opening of the account.

The maximum lump sum deposit permissible under SCSS is Rs 15 lakh, while the minimum is Rs 1,000. And the investments you do in SCSS are eligible for deduction (upto Rs 1.50 lakh per annum) under Section 80C.

Note that the interest earned under SCSS is payable on a quarterly basis and applicable from the date of deposit to 31st March/30th June/30th September/31st December. So, this can perhaps help you meet a portion of your retirement expenses. Note that if you do not claim the interest, such interest shall not earn additional interest. Hence, make it a point to claim the interest you earn on SCSS.

The aforementioned tax-saving avenues offer retirees a regular source of income to meet expenses.

Although the interest earned is taxable, as per the provisions of Section 80TTB, the interest income earned on a bank deposit is exempt up to Rs 50,000 per financial year.

For senior citizens in the age bracket of 60 to 80 years, the base exemption limit is Rs 3 lakh, while for those over 80 years ---referred to as super senior citizens ---the base exemption limit is Rs 5 lakh.

Further, the Union Budget 2021 has given relief to senior citizens aged 75 years and above from filing their income tax returns if pension and interest income is their only source of annual income.

Strategically, in my view, for your tax-saving portfolio, as a retiree, you may follow an 80:20 or 75:25 allocation---depending on your risk appetite---to ELSS (a market-linked tax-saving instrument) and the non-market linked tax-saving avenues discussed above to save tax under Section 80C. This would potentially generate inflation-beating returns as well as offer regular income.

AIso, go beyond 80C while doing tax planning. Make sure you have an adequate health insurance cover taking into consideration medical inflation, your current personal health, your family's medical history, and the state and city you reside in (to assess the healthcare facilities and cost), among a host of other factors. So, review your existing health insurance policy and increase the coverage (if need be). The premium paid on your health insurance policy is eligible for a deduction of up to Rs 50,000 per financial year under Section 80D of the Income Tax Act, 1961.

As a senior citizen, if you are spending on specified diseases such as dementia, motor neuron diseases, Parkinson, cancer, chronic renal failure, and haematological disorders amongst others, you can avail a deduction u/s 80DDB of Rs 1 lakh or actual the amount spent, whichever is less.

Similarly, those of you into philanthropy, do not forget to avail of the deduction under Section 80G of the Income Tax Act, 1961.

Make tax-saving a holistic exercise by complementing it with your investment planning. And do not limit it to only deductions under Section 80C.

Happy Tax Planning & Investing!

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Author: Rounaq Neroy

This article first appeared on PersonalFN here.

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