Senior citizens should focus on post tax returns

Fixed deposits are considered as a safe avenue by senior citizens, as FD’s provide moderate liquidity with fixed returns which come to around 9%. However, the post-tax returns from fixed deposits are low. The reason is that the interest earned from the invested amount is taxable under the head ‘income from other source’ which also has a TDS deduction.

FD’s impose tax on accrual bases. This means irrespective of when we receive it, we will have to pay tax at the end of the financial year. So, the senior citizen would receive 6.25% post-tax returns from FD’s, if the person falls under the 30% tax slab.

Recurring Deposits:

Recurring Deposits will help to develop a habit of saving on a monthly basis. Senior citizens would find this a good practice as they can save on a regular basis. Returns from RD’s are around 8.25% which is lower than the returns from FD’s. However, the interest earned on RD’s is also taxable under ‘Income from other source’.

Even RD’s impose tax on accrual bases. This might hamper liquidity, which is not advisable for senior citizens. If the senior citizens fall under the 30% tax slab, the post-tax returns they would receive will be around 5.7% from RD’s.

Post Office Schemes:

Many of the senior citizens prefer saving in post office schemes. Returns from the post office schemes are around 8.5% to 9%. However, the post-tax returns are considerably lower. The post-tax returns from POS are around 5.9% - 6.2%.

Debt Funds:

Debt funds are tax efficient in comparison with any of the above discussed investment avenues. However, the returns obtained from debt funds are volatile. In debt funds the returns vary due to interest rates in the market. In case there is a cut in interest rates, the bond values would increase contributing to the increase in the debt fund values. Similarly, when there is a hike in interest rates, the bond values would decrease bringing the debt fund values down.

Returns from debt fund would range from the 11% to 12%. Debt funds provide liquidity to the senior citizen, as he can make partial withdrawals from the investments. Taxation would only be applicable on the amount which is redeemed. This is not possible in other saving instruments like FD, RD, etc. as they tax on the whole amount for pre-mature withdrawal.

Long term capital gains are more tax efficient than the short term capital gains. In long term capital gains taxation purchase price is adjusted as per cost of inflation index. The net gain is calculated by subtracting the net proceeds with the indexed cost of purchase. The gain is called long term capital gain and the taxation is 20%.

Below example explain us the post-tax returns from short term capital gains:

Mr. Suresh invests Rs. 1 crore in a debt fund with a return 9% and withdrawn Rs. 10 lacs after one year then he has to pay taxes on the income accrued on withdrawal. The taxation would be approx. INR 25500.

Below example explains us the post-tax returns from different investment options:

Mr. Viswanathan invested equal amounts of Rs. 5, 00,000 into the FD’s, RD’s and Debt Funds for three years from 2011 to 2013. Here we have considered same rate of return for all the investment options, so as to compare the post-tax returns.

*LTCG Tax = (647514 – (500000*1025/785)*20.6% = (647514-652886) = -5351 (Long Term Capital Gain Loss)

Tax paid for long term gain is negative i.e. there is no tax liability for LTCG’s. Moreover, this can be carried forward and can sum up to the next year’s tax liabilities. Thus, from this example it is clear that the debt funds are more tax efficient.

Conclusion:

Returns from the investment should ensure that senior citizens would be able to face any emergencies in future. So, it is prudent to analyze the post-tax returns before we invest our savings into them. It is prudent to take a professional financial planners’ advice to ensure that investments are made appropriately based on the risk appetite of the senior citizen while keeping an eye on the specific monetary needs.