If you are close to retirement or just retired, a financial planner is most likely to tell you this: Move your corpus to debt funds or fixed deposits for safety and invest part of the money, 10-20 per cent (depending on your risk-taking ability), into equities for better returns.
Now, the same financial planner is likely to advise you to invest a little more in equities. The reason: Falling rate of return, in the case of both fixed deposits and debt funds.
In the past few months, many public sector banks, including State Bank of India, Punjab National Bank and United Bank of India, have reduced the premium paid to senior citizens on retail term deposits, by at least 25 basis points (bps). Earlier, the banks were offering between 50 and 75 bps higher than the rack rates on fixed deposits (FDs) for those above 60 years. Now they are offering only 25 bps more.
In addition, while the Union Budget did not hand out any concessions to senior citizens by way of tax exemptions, it imposed a dividend distribution tax (DDT) of 25 per cent (up from 12.5 per cent) on debt schemes. While the tax authorities might claim that it is simply to remove an anomaly between liquid and other debt funds, the fact remains that returns from these instruments will suffer because of this.
For the retired, monthly income plans are good instruments to get regular income. Even financial planners propose this instrument because it reduces the need to dip into your savings on a regular basis. However, with the increase in DDT, the returns will fall to that extent.
A majority of retired people are dependent on returns from their investments, which are largely in bank FDs and debt mutual fund products. Debt is the most preferred investment for senior citizens since it offers stable and regular returns, though it rarely beats inflation. Equities, beat inflation but the returns are volatile. Hence, senior citizens are advised to stay away from equity investments. "Someone in the higher tax bracket will definitely feel the pinch since the post-tax returns on bank FDs will come down to around 6-6.5 per cent," says financial planner Amar Pandit.
Since the long-term capital gains tax is 10 per cent without indexation and 20 with indexation, choosing the growth option for debt funds should become a better option. After this tax rule, the planning has to be better. According to one financial planner, one can put money in the growth option of a monthly income plan for one full year, then opt for a monthly systematic withdrawal plan from the next year.
But remember to withdraw only the gains. For instance, if you invest Rs 10 lakh and it appreciates to Rs 11 lakh in a year, then you must not withdraw over Rs 1 lakh. "There will be long-term capital gains tax of 10 per cent, but not DDT," says Nikhil Naik, managing director of Nikhil Wealth. Otherwise, dabble a little more in equities in the initial years of retirement to ensure the corpus becomes much bigger.