It's tax planning time once again. But for one group of citizens tax planning is an entirely different game. Senior citizens can't afford to lock up their money for long stretches.
As a result, various investment instruments which fall under Section 88, such as Public Provident Fund (PPF), lose their significance because the lock-in period is around 15 years.
So where should senior citizens put their money? "That will basically depend on whether they are high tax payers or fall in the low tax bracket," says Sanjiv Bajaj, director, Bajaj Capital.
Senior citizens have the benefit of Section 88B under which they are eligible for a rebate of Rs 20,000 from tax liability.
The choice of investment instruments depends upon whether you are a high tax payer or fall in the low tax bracket.
For those in the low tax bracket, 8 per cent Post Office Monthly Income Scheme and the 8 per cent RBI bonds (taxable) are recommended.
High tax payers should opt for 6.5 per cent RBI tax free bonds.
Senior citizens also have the benefit of Section 88B under which they are eligible for a rebate of Rs 20,000 from tax liability. However, for income tax purposes, a senior citizen is a person who turns 65 (and not 60) before March 31.
"Persons in the low tax bracket can go in for schemes which give high and regular returns, even if they are taxable," says Bajaj.
He recommends investing in the 8 per cent Post Office Monthly Income Scheme. Under the scheme, one gets returns of 8 per cent every annum and a 10 per cent bonus on maturity after six years.
The maximum investment is Rs 300,000 in an individual's name and Rs 600,000 in a joint account. The interest income from Post Office Monthly Income Scheme is eligible for deduction under Section 80L up to Rs 12,000. Let's take the hypothetical example of Mr XYZ Sharma.
If he invests Rs 200,000 in the Post Office Monthly Income Scheme, he will earn interest at the rate of 8 per cent that is Rs 16,000. On this Rs 16,000, he will get a deduction of Rs 12,000 and the remaining Rs 4,000 will be added to his taxable income.
Another investment option is the 8 per cent RBI Bond (taxable).There is no limit on the maximum amount that can be invested in these bonds. There is a lock-in period of six years, with no exit option. Interest is paid every six months.
Says Rohit Sarin, partner, Client Associates, "For persons in the lower tax bracket of 10 per cent, 8 per cent RBI bonds are very suitable since they give regular returns."
The systematic investment plan (SIPs) offered by the mutual funds are another investment option recommended by financial advisors for senior citizens.
"The most important thing about SIPs is the liquidity which they offer, which is essential in the case of a senior citizen," says Bajaj. Here also, it is the debt funds which are considered more suitable.
Says Sarin, "Regular returns are possible only when there is little volatility. If the fund is more debt and less equity, volatility will be low and hence returns will be more regular." Monthly income plans (MIPs) of funds with a debt-equity ratio of 80:20 is the best bet.
After one year, mutual funds also give you the option of systematic withdrawal facility. Senior citizens can give standing instructions and withdrawals can be made accordingly.
For instance, Mr Sharma can give instructions that units worth Rs 5,000 should be sold every month. This way he is ensured of a regular income of Rs 5,000 every month.
Surprisingly, LIC's 9 per cent Varishtha Bima Yojna, a pension scheme for senior citizens is not recommended by most consultants. That's chiefly because it has a lock-in of 15 years.
Also, the maximum pension one can receive is only Rs 2,000. Says Bajaj, "One is assured of higher returns in case of say the Post Office Monthly Income Scheme, so why put your money in Varishtha Bima Yojna?"
For senior citizens falling in the highest tax bracket of 30 per cent, 6.5 per cent RBI tax-free bonds are the best bet. Says Sarin, " Persons in the high tax bracket first need to reduce their tax liability and hence need to invest the maximum amount in the tax-free bonds."
The 6.5 per cent bonds have a lock-in of five years but an exit option is available after three years. Interest is paid half-yearly.
All senior citizens, whether in the high or the low tax bracket, must take medical insurance. Not only will they get a deduction under Section 80 D, up to Rs 15,000 from gross taxable income but will also ease the burden of paying high hospital bills.
Life insurance is also a must. Unfortunately, if you haven't bought insurance before you turn 60, there is very limited choice. The LIC offers three policies -- New Jeevan Shree, Jeevan Anand and Jeevan Rekha -- which can be taken by persons above the age of 60 but below the age of 65. None of the private insurance companies offer insurance cover at that age. Also, the premium is much higher.
For instance, if you take the lifetime term of the Jeevan Rekha policy at the age of 60, then for every Rs 1,000 sum assured you will pay a premium of Rs 81.90. On the other hand, for a 40 year old, this premium is Rs 42.65.
The Government is likely to launch the Dada-Dadi bond soon, which is also meant for senior citizens. However, currently no details on these bonds are available.