Nov 27, 2017 01:40 PM IST | Source:

Five ways of earning regular income post retirement and the tax liabilities

Dividends declared by mutual funds are not assured. Neither the quantum not the timing are guaranteed.

Nikhil Walavalkar @nikhilmw

Regular income is a need of an individual. While one is employed, the monthly salary addresses the financial needs. The self-employed individuals may not have monthly income but they earn their living out of profits arising out of professional activities and businesses. However, when one chooses to retire, he/she again starts looking for regular income as the ‘income earning activities’ stop.

Here are five ways by which a person can earn regular income and the income tax treatment thereof:

Salary and pension: Contrary to popular belief, pension receipts are treated like any other income and taxed as per income tax slabs applicable. Salary, too, is taxed as per the applicable income tax slab. If you have regular pension as your only source of income, and yearly pension amounts to less than Rs 2.5 lakh, then you need not pay any income tax. As your income from these sources grow, you are taxed. No wonder most smart investors in the high tax bracket of 30% avoid buying annuities due to the high tax impact.

Interest on bonds and fixed deposits: Interest paid on bonds and fixed deposits are good source of regular income. Depending on your income needs you can choose to invest in bonds that offer regular interest. Many fixed deposits offerings also pay interest monthly, quarterly and annually. One can choose the interest payment frequency that suit one’s needs.

“Senior citizens can opt for senior citizens' saving scheme to enjoy the twin benefits of higher rate of interest of 8.4% and tax exemption under section 80C of Income Tax Act,” says Balwant Jain, a Mumbai-based income tax expert. He advocates investing in Pradhan Mantri Vay Vandana Yojana if one is looking to lock in interest rate of 8% for ten years.

Dividends on shares and equity mutual funds: Companies pay out dividends out of the profits they have earned. Generally, companies pay dividends once a year. The quantum of the dividend is dependent on the profit of the company. Hence, neither the amount nor the frequency is guaranteed. Though the dividends declared by the listed companies in India are tax free in the hands of the investors, yearly income in excess of Rs 10 lakh by way of dividends attract a tax at the rate of 10%. Companies also pay dividend distribution tax at the rate of 17% on the quantum of dividend paid.

Equity mutual funds, too declare dividends from time to time depending on their profits. These neither attract dividend distribution tax nor a tax on dividend. Moderate risk taking investors can invest in dividend option of equity saving funds that have 35% allocation to stocks. These schemes are treated as equity funds for the purpose of taxation and hence the investor can enjoy tax free dividends.

Some balanced funds have launched a monthly dividend option and many investors looking for regular income have embraced it. However, not many experts are upbeat about it.

Dividends on debt mutual funds: Though dividends declared by debt mutual funds or other non-equity mutual funds can offer regular income and it can be less volatile as compared to dividends declared by equity mutual funds. Dividends declared by all mutual fund schemes other than equity mutual fund schemes are subject to dividend distribution tax. The tax is deducted by mutual fund house and paid to the government at the rate of 28%. The dividends received after that is tax free in the hands of the investor.

Systematic withdrawal plan (SWP) of mutual funds: You can also opt for a systematic withdrawal plan from the mutual fund. This enables you to withdraw a fixed sum of money by selling your mutual fund units at regular intervals, say monthly. This is more tax efficient means to earn regular income from mutual funds as the sale attracts tax on capital gain. If you decide to withdraw from a non-equity mutual fund, you are expected to pay long term capital gain at the rate of 20.6% after indexation, provided you have held the investments for at least three years. In other cases, the gains are added to your income and taxed at marginal rate of tax. “Risk averse investors should invest their money in growth option of monthly income plans of mutual funds and opt for an SWP,” says Balwant Jain.

In case of equity mutual funds, there is no tax on long term capital gains – gains arising out of investments that were held for more than one year. For short term investments the gains are taxed at 15.45% rate of tax.

Personal finance experts advise investors to opt for a judicious mix of investment avenues that offer to pay regular income. Never go overboard on any one of them.

tags #Planning

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