How senior citizens can get richer!

By Kapildeo Singh

Senior citizens must have been ecstatic with the new tax slabs in the Union Budget 2007-08. The tax-free income limit for the elderly stands at Rs 2.25 lakhs now, as opposed to Rs 1.95 lakh last year.

New tax slabs for senior citizens (from April 1, 2008)                        

Sridhar Vetapalem, a specialist in financial planning, tips us on how to save this extra money.

Note: The examples listed below are only indicative, depending on the individual’s situation.

Case 1: If your annual income is up to Rs 3 lakh
“In this case, tax saving should not be on top of your list. Liquidity should be,” suggests Sridhar.

As per the new tax slabs, income between Rs 1.5 lakh and Rs 3 lakh falls in the 10 per cent tax bracket. So, the effective taxable income on Rs 3 lakh is Rs 7,500 as compared to your earlier tax regime where you would have had to pay taxes of Rs 26,000.
Rs 3 lakh – Rs 2.25 lakh = Rs 75,000
10 per cent on 75,000 = Rs 7,500 payable as tax.
 
Investment options:
To save this tax amount you’ll have to invest Rs 75,000. Sridhar recommends bank fixed deposits (FDs) for senior citizen across all the tax slabs. The reason is simple. Sridhar says, “Bank FDs are one of the safest avenues to park your money in.

They also provide decent returns at around 9 per cent and are liquid. Also, make sure the bank FD has been opened jointly with your spouse or children so that it can be accessed when needed. Money which isn’t accessible at the time of need is like having no money at all.”

What you should not do:

1. “Ideally, senior citizens should avoid Unit-Linked Insurance Plans (ULIPs) as an investment class because of the high mortality charge and other expenses involved in the ULIPs. Instead, if you have enough contingency funds with you, you could as well look at investment in equity or good mutual funds to get better returns.”

2. Avoid investments that have a long lock-in period such as a new Public Provident Fund (PPF) account (which has a 15-year lock-in period) or a long-term postal deposit scheme and other illiquid schemes such as Postal Monthly Income Scheme or time deposit, National Savings Certificate etc.

This apart, if you already have a health insurance policy, it's good. However, if you don’t then getting one at this age will be either impossible or very expensive with many exclusions.

In this case, it becomes very important to (or at least try to) set aside 25 to 35 per cent of your annual income as a contingency fund. This percentage depends largely on your money situation.

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