Retire, And Earn More

If planned well, your retirement can genuinely open up new horizons for your second innings in life, where you can enjoy peace, dignity and financial security. Since it is essential to have a monthly income that meets your expenses post-retirement, there should be a steady income stream, apart from the pension. Employees often receive lump sum of money upon retirement, which they mostly have no idea about where to invest.

Stacking up your retirement money in one place can attract taxes as well as inhibit your asset growth. Why invest everything in one scheme or fund, or worse, leave it lying in your bank when you can create a short and long-term return plan to keep your cash flowing?

If you are wondering how to create a diverse investment portfolio that pays off well and saves your taxes once you cross Rs 3 lakh income tax exemption for senior citizens here is expert guidance. You can invest in products where either the yearly income or the maturity amount is tax-free. There is  an array of investment alternatives:

Equity Or Equity Mutual Fund

Long-term capital gains from stocks and equity mutual funds are taxable at 10 per cent on the income over Rs 1 lakh, making these two products ideal for your portfolio.

However, avoid overinvestment in stocks after retirement because they have an element of risk. Stocks must make a part of your portfolio because you need to generate returns that are higher than inflation to maintain your current lifestyle.

Dividends received from stocks and equity mutual funds are taxed at the recipient’s hands. However, short-term capital gains or profits made by selling these products within a year of purchase attract 15 per cent tax. Hence, it is prudent to invest in stocks for the long term.

Balanced Funds

Balanced funds, also called equity-oriented hybrid funds, are safer than stocks or equity mutual funds. They invest almost 35 per cent of their assets in government or corporate bonds. Still, they are taxed like equity and mutual funds at 10 per cent over Rs 1 lakh threshold on long-term capital gain, and dividend taxable at the recipient’s hands as per the slab rate.

Balanced funds can generate a double-digit income even with low-return debt securities. Hence, they make an excellent long-term investment.

Public Provident Fund (PPF)

Public provident fund is one of the few investment alternatives exempt from tax during both investment and maturity under Sections 80 C and 10 (10D) of the Income Tax Act. Though PPF is mainly preferred to create a retirement fund given its tax benefits, you can also use it to park a part of the final income received upon retirement by extending the existing account for five years each term. Do this instead of closing the existing one to open a new one, which will lock your corpus for 15 years.

Tax-Free Bonds

Tax-free bonds are long-term fixed income products that have a lock-in for 10 to 15 years. The interest earned is non-taxable, but you are liable to pay tax on capital gains, if sold. The interest rate is lower than what a bank fixed deposit offers, but investors in higher tax brackets prefer them as they offer a tax-free income. Government-approved establishments issue tax-free bonds for a limited period, but you can buy these from a stock exchange. Invest only in high-rated bonds to ensure financial safety.

National Pension Scheme (NPS)

Those who have reached 60 years of age can choose NPS as a corpus where the alternatives and pension fund manager, among other factors, stay the same. After three years, you can take a normal exit and withdraw a maximum of 60 per cent of the cumulative amount.

The balance will have to be annuitised mandatorily. This means you will have to purchase a pension scheme or annuity from one of the life insurance firms, using the remaining 40 per cent. If you exit before three years, you can withdraw only 20 per cent and the pension will be paid on the remaining 80 per cent. Amounts contributed to NPS qualify for deduction under Section 80 CCD (1) up to a limit of Rs 1.5 lakh in a financial year as well as Section 80CCD(1B) up to Rs 50,000. The maximum age limit to opt for NPS is 65 years.

Monthly Income Scheme (MIS)

Bank and post office monthly income schemes are like bank fixed deposits with monthly interest payments. It is one of the most reliable income sources for retired individuals.The interest received every month is at a discounted value and taxed, reducing your post-tax returns in the higher tax brackets. So, this is ideal only for senior citizens with a 10 per cent income bracket.

Mutual Fund Monthly Income Plans (MIP)

Since the bank MIS is not tax-friendly for those in the 20 and 30 per cent tax brackets, the mutual fund MIP offers a better plan. MIPs invest in debt and equity for a regular income through periodic dividend payments on a monthly, quarterly, or half-yearly basis.

Senior Citizen Savings Scheme (SCSS)

Retired individuals who have crossed 60 years or are between 55 and 60 and have taken a voluntary retirement scheme can invest in SCSS for a tenure of five years, which is extendable for three years. You can open more than one SCSS account, but the cumulative investment cannot be more than Rs 15 lakh. The interest in SCSS is paid quarterly at 7.4 per cent and is clubbed with income for taxation. Tax-deductible at source is applicable if the interest exceeds Rs 10,000, but SCSS qualifies for a deduction under Section 80C. Submitting form 15H will help you avoid tax payment if you fall below the senior citizens’ taxable threshold.

Insurance Annuity Plans

In insurance products, you can pay a lump sum amount and determine the returns’ frequency and quantum, making a regular income source. The insurer determines the insurance annuity plan premium, depending on the market rates, age, and the annuity payout.

Such an annuity is guaranteed for life and usually benchmarked according to medium or long-term government bonds. You can claim a deduction under Section 80CCC but will be liable to taxes on the payout if it exceeds the exemption limit.

If your income falls below the tax exemption limit after clubbing the annuity amount or is in the 10 per cent tax bracket, an annuity is a good alternative for a regular lifetime income. If you are fast approaching 60 or have turned 60 and have a substantial amount of money in your possession, we advise you to dispense them by investing them in different schemes quickly, stocks, or funds that you find most lucrative.

Since the banks provide a shallow interest on your savings, it is advisable not to keep your capital stagnant and instead create a diverse portfolio involving short, medium and long-term returns that take care of your immediate and future financial needs, keeping in mind the time value of money.

The author is the Co-Founder & CEO of Elearnmarkets & StockEdge