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MUMBAI, Maharashtra /
The Economic Times / Features / Investors Guide / July 27, 2009
By Economic Times Bureau
Life expectancy here has been steadily rising owing to improved standards of living, and better medical and healthcare facilities. The golden years now constitute almost a third of one's lifetime and senior citizens today choose to be actively employed even in postretirement years. This leads to supplementary income in hand in addition to pension, and hence managing money to yield optimum returns at the desired levels of risk becomes important for this age group too.
The primary objective for senior citizens with regard to their investments is the protection of capital, and rightly so. Senior citizens also enjoy certain privileges with respect to interest rates and tax provisions. The Budget 2009 put additional money into the pockets of senior citizens by increasing the basic tax exemption limit by Rs 15,000 which means that no tax would be levied on income up to Rs 240,000.
One must remember though that a senior citizen, as per the Income Tax Act, is a citizen who has completed 65 years of age. As far as banks are concerned, the interest rates for senior citizens can be availed on completing 60 years of age.
Here are some options for senior citizens:
Senior Citizens' Savings Scheme
This scheme, launched in 2004, is available to citizens who have completed 60 years of age. The maximum investment amount is Rs 15 lakhs and the scheme earns an interest of nine percent per annum payable on a quarterly basis.
Although the interest earned is taxable, it qualifies for deduction under Section 80C of the Income Tax Act. It has a maturity of five years which can be extended for a further three years.
Since this scheme is backed by guarantee by the government, it is a very safe investment and provides a periodic income in the form of interest.
Bank fixed deposit
The bank fixed deposits (FDs) do not provide any tax benefits (except five-year FDs that qualify under Section 80C).
But, a senior citizen gets a better interest rate than other individuals.
Banks usually pay half to one percent more in case of senior citizens.
Post office monthly income scheme
The post office monthly income scheme (MIS) offers a fixed monthly return in the form of interest and is not restricted to senior citizens only. There is a cap of Rs 450,000 for a single account and Rs 900,000 for a joint account.
MIS earns interest at eight percent per annum paid out on a monthly basis. Although there are no tax benefits and interest is taxable, no TDS is deducted on the interest. The tenure is fixed for six years and there is a fivepercent payout in the form of bonus on maturity.
With deposit rates on bank FDs dropping, MIS can be a suitable alternative for senior citizens requiring a regular stream of income.
Monthly income plans of mutual funds
The monthly income plans (MIPs) used to be quite popular with senior citizens since they offered dividends on a monthly or quarterly basis with no hassles of paying tax on it.
These plans usually invest 15-30 percent of the corpus in equity and remaining in debt. This investment, however, lost sheen when the equity markets crashed and many schemes could not distribute dividends.
However, with the markets gaining some momentum, these plans have become attractive again.
One can choose to park around 10-15 percent of the overall portfolio in a MIPs with a low equity investment and good dividend-paying history.
Balanced and equity funds
In order to improve the overall returns and enjoy tax benefits, a portion of the total corpus can be diverted into good quality balanced and equity diversified funds. However, having seen turbulent times in the stock markets, the extremely risk-averse investors may at best stick to MIPs or balanced funds.
Dividend option of quality large-cap and diversified funds would work well for those investors who do not have liquidity concerns and are looking at a slightly long-term investment.
Drawing a fine balance between risk and return is important for a senior citizen to meet the two most important objectives - capital preservation and fighting inflation. [
rc]
Copyright © 2009 Bennett Coleman & Co. Ltd
Life expectancy here has been steadily rising owing to improved standards of living, and better medical and healthcare facilities. The golden years now constitute almost a third of one's lifetime and senior citizens today choose to be actively employed even in postretirement years. This leads to supplementary income in hand in addition to pension, and hence managing money to yield optimum returns at the desired levels of risk becomes important for this age group too.
The primary objective for senior citizens with regard to their investments is the protection of capital, and rightly so. Senior citizens also enjoy certain privileges with respect to interest rates and tax provisions. The Budget 2009 put additional money into the pockets of senior citizens by increasing the basic tax exemption limit by Rs 15,000 which means that no tax would be levied on income up to Rs 240,000.
One must remember though that a senior citizen, as per the Income Tax Act, is a citizen who has completed 65 years of age. As far as banks are concerned, the interest rates for senior citizens can be availed on completing 60 years of age.
Here are some options for senior citizens:
Senior Citizens' Savings Scheme
This scheme, launched in 2004, is available to citizens who have completed 60 years of age. The maximum investment amount is Rs 15 lakhs and the scheme earns an interest of nine percent per annum payable on a quarterly basis.
Although the interest earned is taxable, it qualifies for deduction under Section 80C of the Income Tax Act. It has a maturity of five years which can be extended for a further three years.
Since this scheme is backed by guarantee by the government, it is a very safe investment and provides a periodic income in the form of interest.
Bank fixed deposit
The bank fixed deposits (FDs) do not provide any tax benefits (except five-year FDs that qualify under Section 80C).
But, a senior citizen gets a better interest rate than other individuals.
Banks usually pay half to one percent more in case of senior citizens.
Post office monthly income scheme
The post office monthly income scheme (MIS) offers a fixed monthly return in the form of interest and is not restricted to senior citizens only. There is a cap of Rs 450,000 for a single account and Rs 900,000 for a joint account.
MIS earns interest at eight percent per annum paid out on a monthly basis. Although there are no tax benefits and interest is taxable, no TDS is deducted on the interest. The tenure is fixed for six years and there is a fivepercent payout in the form of bonus on maturity.
With deposit rates on bank FDs dropping, MIS can be a suitable alternative for senior citizens requiring a regular stream of income.
Monthly income plans of mutual funds
The monthly income plans (MIPs) used to be quite popular with senior citizens since they offered dividends on a monthly or quarterly basis with no hassles of paying tax on it.
These plans usually invest 15-30 percent of the corpus in equity and remaining in debt. This investment, however, lost sheen when the equity markets crashed and many schemes could not distribute dividends.
However, with the markets gaining some momentum, these plans have become attractive again.
One can choose to park around 10-15 percent of the overall portfolio in a MIPs with a low equity investment and good dividend-paying history.
Balanced and equity funds
In order to improve the overall returns and enjoy tax benefits, a portion of the total corpus can be diverted into good quality balanced and equity diversified funds. However, having seen turbulent times in the stock markets, the extremely risk-averse investors may at best stick to MIPs or balanced funds.
Dividend option of quality large-cap and diversified funds would work well for those investors who do not have liquidity concerns and are looking at a slightly long-term investment.
Drawing a fine balance between risk and return is important for a senior citizen to meet the two most important objectives - capital preservation and fighting inflation. [rc]
Copyright © 2009 Bennett Coleman & Co. Ltd
