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Retired? Make informed decisions related to your investments

Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money –(Jonathan Clements).

Retirement can be great joy all through your life, if you have sufficient money to spend. One of the greatest difficulties after retirement you may face is handling of lump-sum money you have received from PF, Gratuity, Leave encashment, commutation of pension etc. For the investment of retirement corpus, you will have to structure your investments in two ways.

First step is that you will have to keep certain amount of money for investment under monthly investment plans details of which we will discuss at later part of this post. The monthly income plans reflects in a way to give you regular income that comfortably covers your regular expenses, besides added expenses like medical expenses, travelling expenses, payment of taxes, spending on social engagements and so on.

Secondly, you have to think about reserving higher principal amount from retirement corpus for long term safe investments which generates a higher income. This is with a view to offshoot your higher expenses which will go up over the years due to inflation.

Let us look at safe investment avenue available to retirees.

(The rate of interest  on Small Savings  instruments are subject to change on each quarter (Feb-Apr, May – July, August-October, November -January).

The Finance Ministry in a statement on June 19, 2016, said that interest rate on small savings scheme for the quarter  July-October 2016 has been kept unchanged.
The current rate of interest on the following instruments is as under.
Interest rate on five-year senior citizens savings scheme is 8.6 % p.a
Interest rate on five-year recurring deposit is 7.4% p.a
Interest rate on one-year deposits @ 7.1%
Interest rate on two-year time deposits @ 7.2%
Interest rate on three-year time deposit @ 7.4% p.a
and for five-year time deposit@ 7.9 % p.a
Public Provident Fund Scheme earns an interest rate of 8.1% p.a
Kisan Vikas Patra 7.8 % p.a (maturity period of 110 months).
The interest rate on Sukanya Samriddhi Account Scheme is 8.6% p.a

Bank deposits: Banks accept special fixed deposits with interest payable at a regular interval (monthly/ quarterly) as per customer’s requirements. The interest rate is the same as applicable to prevailing fixed deposits. You can think about investing in bank deposits under monthly/quarterly income scheme to meet your regular expenses. In India, all the banks offer interest around 9.00% (0.50% extra) interest to the senior citizen over their card rates. You must know that interest rates offered on fixed deposits by banks are not uniform. Different banks (including public sector banks) offer the different rate of interest for the various period of maturity. You will have to compare the interest rates offered by them before investments. If a bank offers the higher rate of interest  for longer maturity period it is advisable to keep the deposit forthe  longer period as –deposit rates of banks have come down in recent months. You can place your deposit on reinvestment deposit plan which generates a higher income by way of compound interest. Interest earned on Fixed Deposits is accounted for taxable income. According to the new ,banks will have the discretion to offer differential interest rates based on whether the term deposits are with or without-premature-withdrawal-facility subject to the following guidelines:All term deposits of individuals (held singly or jointly) of ₹ 15 lakh and below should, necessarily, have premature withdrawal facility.In case of all term deposits other than deposits of individuals of ₹ 15 lakh and below, banks can offer deposits without the option of premature withdrawal as well.However, banks that offer such term deposits should ensure that at the customer interface point the customers are, in fact, given the option to choose between term deposits either with or without premature withdrawal facility.

Tax Saver Fixed Deposits issued by Banks: An individual or HUF can invest in Tax saver fixed deposits of banks, not exceeding the aggregate limit of Rs.150000.00 u/s 80 (C) of IT in a financial year is eligible for tax relief. The ‘deposit’ can be opened in single name or joint names of an adult with a minor or in the joint names of two adults, payable to either or survivor.  The Joint account cannot be opened for more than two people. In case of joint accounts, only the first named person in the ‘Tax Saver Deposit’ can claim the tax rebate. Banks accept Tax Saver deposit for a minimum period of 5 years. The nomination is permitted in tax saver deposits. Interest payable on tax saver deposit is normally equivalent to interest paid by the bank to its other types of deposits for the same tenure. Normally all the banks offer 0.50% extra interest to senior citizen of age 60 years and above. In tax saver deposits, the deposit can be placed under reinvestment deposit scheme where principal and compound interest payable at the time of maturity or in fixed deposits with interest payable to depositor at half yearly or quarterly rest. Interest on tax saver deposits, is accounted as interest income of the depositor and tax on the interest paid is deducted at source.The tax saver deposits cannot be closed prematurely before 5 years. Neither a loan can be availed against the security of it nor can it be offered as collateral security.Return on investments: All the banks at present offer almost the same rate of interest 8.5%/9.00% on tax saver deposits.TAX rule (ETT): Investment is eligible for tax exemption u/s 80c, Interest earned is taxable, and Redemption proceeds are added to taxable income.

Senior Citizen’s Savings Scheme (SCSS): Investment in Senior Citizen’s Savings Scheme is a good option for regular income. The scheme offers 9.30% assured return and investment is eligible for income tax rebate u/s 80C. The maximum investment permitted under this scheme is Rs.15 lakh. Return on the investment is accounted for taxable income. Tenure of the SCSS deposit is 5 years, which can be extended by 3 years. Premature closure permitted after one year of opening the account but with penalty. Investment to be made in multiples of Rs.1000.Interest compounded on quarterly rest.  Minimum eligible age for investment is 60 years (55 years for those who have retired on superannuation or under a voluntary or special voluntary scheme). The retired personnel of Defence Services (excluding Civilian Defence Employees) will be eligible to invest irrespective of the age limits subject to the fulfillment of other specified conditions. SCSS is issued by post office and public sector banks.

Systematic Withdrawal Plan (SWP): If you are coming under higher tax bracket, you can think of investing in short term debt funds to avoid higher rate of tax. The Systematic Withdrawal Plan (SWP) of mutual funds is just opposite of SIP. It is a short term debt funds where Mutual funds provide monthly income plan to investor with a provision to either to increase or decrease their monthly withdrawal or change the frequency of withdrawal monthly to quarterly. Payout can be made from capital appreciation and principal. If capital appreciation of the investment is less than the withdrawal amount then principal amount invested by you may erode. Investors are liable to pay capital gain tax (short term/long term) on their SWP investment.

Continuation of PPF account after maturity:  PPF account holders have an option of extending their accounts after the 15 year tenure with or without further subscription, for any period in a block of five years. Return on the investment is 8.70%. The balance in the account will continue to earn interest at normal rate as admissible on PPF account till the account is closed. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year. If you continue the account after 15 years, with continued deposit, withdrawal up to 60 per cent of the balance at the beginning of each extended period (block of five years) is permitted.

TAX rule (EEE):  Investment in PPF is eligible for tax exemption u/s 80C IT act. Income is exempt from tax, and Redemption proceeds are not added to tax

ELSS (Equity-Linked Savings Scheme): ELSS is an open ended diversified equity fund offered by mutual funds. In this scheme the investor’s money is chiefly invested in the portfolio of equity shares. In the recent past, investment in ELSS has given very good returns to the investors even in the bearish market.

Highlights of ELSS funds

  • The 3 years lock-in-period is the shortest among the tax saving instruments and investor can safely recycle his investments every three years and claim tax benefits on the reinvested amount.
  • No tax payable on the profit earned from ELSS.
  • The minimum investment is as low as Rs.500.00
  • There is no compulsion to continue investments in subsequent years.

If you wish to invest in ELSS, you must remember that the money deposited by you in the scheme is reinvested by funds manager in equity related investments. Such investments are exposed to market risk. Even a fund which is showing very good performance at present may end with disappointing returns at a future date. Investors who have the appetite for taking the risk could consider the option of investing in ELSS.

Return on investments: According to electronic media and newspapers, the return on investment in ELSS is as high as 27.34% in past three years.

TAX rule (EET):  Investment is eligible for tax exemption, Return is eligible for tax exemption and Redemption proceeds are added to taxable income.

Related article: Reverse mortgage loan scheme, windfall to senior citizen

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