TAX EFFICIENT

RETIREMENT
SUBMITTED BY:- SUBMITTED
TO:-
KARTIK GOEL MR. CHINMAY
TIWARI
Agile Capital Services Pvt. Limited
 Introduction
One’s working life, with all its ups and downs, may have come to an end. The
provident fund accumulated over the years looks good. And if one is entitled to
pension, it is another calming thought during his post-retirement years . Then there
are other savings that he set aside during your working years for old-age security.

But can one relax looking at the aggregate savings, hoping that his days of careful
financial planning are over? Most certainly, he can't. His financial worries have not
come to an end. What he will do with all the money he have got at retirement?

Collecting pension and provident fund money is work half-done. One has to plan
meticulously to not only make your money yield returns that are higher than inflation
but also minimise the amount he has to pay as tax.
 Retirement is not end of earning
Retirement does not mean the end of income. So, it is important to identify the sources of income on which you
have to pay tax.

Other than salary, tax is payable on income from property, that is, rent; capital gains (long and short term); and
dividend and interest from equity and fixed-income investments.

Pension is also taxed as per the tax slabs for senior (60 years and above) and very senior citizens (80 years and
above), depending on whether it is received as a lump sum (commuted) or in a staggered manner.

Commutation means payment of a lump sum in lieu of surrender of a part of the pension.

Non-commuted pension is taxed at the prevalent rate. Commuted pension for government employees is exempt
from tax. However, for non-government employees, one-third pension is exempt if they have received gratuity and
half is exempt if they have not received gratuity.

Assuming you do not take up a job after retirement and your only sources of income are pension, rent and
equity/fixed income investments, let's see how you can pay the least possible tax.
 Different Options
 Long term, no tax at maturity
1. Equity/equity mutual funds
2. Balanced funds
3. Public Provident Fund
4. Tax-free bonds
 Regular income; interest, maturity taxed
1. Monthly income schemes (MIS)
2. Mutual fund MIPs
3. Senior Citizen Savings' Scheme (SCSS)
4. Insurance annuity plans
5. Reverse mortgage loan
 Medium, short-term
 Long Term, No Tax at
Maturity
Sumeet Vaid, CEO, Freedom Financial, says the portfolio will vary according to the
amount available, the person's lifestyle and his risk appetite.

Tax should also be a big factor, given that with higher pensions and bigger annuity
packages, post-retirement income can now easily cross the Rs 2.5 lakh income-tax
exemption limit for senior citizens.

"In order to minimise tax, invest in products wherein either the yearly outflow or the
maturity amount is taxfree," says Anil Rego, chief executive officer and founder, Right
Horizons, a wealth planner.

There are, however, few products where the maturity amount is not taxed.
 Equity/Mutual Funds
Long term capital gains (on redemption after a year) from stocks and equity mutual funds are not taxed.
Hence, these two products are ideal for investing a part of the corpus.10 per cent is the tax you pay on
long-term capital gains made from selling fixed-income securities, irrespective of the tax bracket you are
in.
However, experts say one must avoid over-exposure to stocks after retirement because they are risky.

But given the need for generating returns higher than inflation so that one can maintain his/her present
lifestyle in the future, stocks must be a part of his/her portfolio.
One need to generate inflation adjusted returns and debt assets cannot do that consistently. One need to
have some equity exposure," says Surya Bhatia, managing partner, Asset Managers, an investment
manager.

Dividends from stocks and equity mutual funds are tax-free. However, short-term capital gains, that is,
profits made by selling within a year of purchase, attract 15 per cent tax. To avoid this, invest in stocks
for the long term.
 Balanced Funds
Balanced funds, or equity-oriented hybrid funds, are safer than stocks/equity mutual
funds as they invest up to 35 per cent assets in government and corporate bonds.

They are safer than pure-equity funds but are taxed like them-no tax on long-term
capital gains and dividends.

Balanced funds have been able to generate double-digit returns over the years despite
exposure to low-return debt securities.

One can use these funds for long term income generation without paying any tax.
 Public Provident Fund
Public Provident Fund (PPF) is among the few options exempt from tax at both
investment and maturity stages under Section 80 C and Section 10 (10D) of the
Income Tax Act, respectively.

Rs 10,000 is the maximum annual interest you can earn without TDS. However, if
you have not paid any tax in the previous year, you can avoid TDS by submitting
Form 15H (for senior citizens) and Form 15G (for others).
One can invest up to Rs 1,00,000 every year in PPF. It has a lock-in of 15 years.
However, one can extend the account three times after the end of the 15th year in a
lot of five years. At present, PPF is offering 8.8 per cent annual interest, which is
linked to the 10-year government bond yield and is revised every year.
Though PPF is mainly the preferred route for building a corpus for retirement
because of its tax benefits, it can also be used to park a part of the final corpus,
preferably by extending the existing account in blocks of five years instead of
opening a fresh account and locking the money for 15 years.

You can withdraw a part of the corpus from seventh year. This amount cannot
exceed 50 per cent of the corpus at the end of the preceding year. You can also take
a loan against the corpus from third-year onwards. The rate for this is two
percentage points more than what is offered to investors.

PPF investments also qualify for deduction under Section 80 C of the Income Tax
Act. This reduces the overall tax burden.
 Tax Free Bonds
These are long-term fixed-income products with a lock-in of 10-15 years. The interest that you get is not taxed. However,
if you sell the bonds on stock exchanges, where they are traded, you have to pay capital gains tax. Forms 15G and 15H
are a declaration that the person's tax liability during the year will be nil.

Usually, the coupon or the rate of interest is less than that offered by bank fixed deposits of similar tenure. However, the
tax-free income that they generate makes them attractive for investors in higher tax brackets.

Let's take the example of National Highways Authority of India's bond issue earlier this year. The bond was offering 8.2
per cent annual interest for 10 years. Since the interest is tax-free, the effective yield for a person in the 30 per cent tax
slab is 11.88 per cent {Effective yield=coupon/(1-tax rate)}.

Simply put, for every Rs 1 lakh invested, you would earn Rs 8,200 a year. If you were in the 30 per cent tax bracket, you
would have paid Rs 2,460 out of Rs 8,200 as tax had the returns not been tax-free.

Tax-free bonds are issued by government-approved institutions for a limited period. However, one can buy these on stock
exchanges. Experts say one must invest in only highly-rated bonds for safety.
 Regular Income; interest, maturity
taxed
The options discussed earlier are for the long term. That is
why only a part of the corpus can be invested in them.

After retirement, the main concern is generating regular

income. Here are the options for that.

1. Monthly income schemes (MIS)

2. Mutual fund MIPs
3. Senior Citizen Savings' Scheme (SCSS)
4. Insurance annuity plans
5. Reverse mortgage loan
 Monthly Income Schemes (MIS)

Bank and post-office MIS are similar to bank fixed deposits, but with monthly interest
payments. It is one of the most reliable sources of income for the retired.
TDS ON FD INTEREST
If interest from fixed deposits exceeds Rs 10,000 in a financial year, the bank deducts tax at
the rate of 10%. If one do not furnish the Permanent Account Number issued by the Income
Tax Department, the bank will deduct tax at the rate of 20%.

Form 15H and 15G

One can submit forms 15H and 15G to avoid tax deduction at source. A person who is 60
years or more can submit Form 15H, but only if he/she has not paid tax in the previous
assessment year. The form must be submitted at the start of the financial year. Form 15G is
for individuals below 60 years of age and Hindu undivided families.
SWP IN MIPS
To tide over the uncertainty over dividend payments in MIPs, investors can opt for
systematic withdrawal plans (SWPs).

In SWP, you can choose the frequency and quantum of payments. If the scheme fails to
generate returns that match the agreed payout, you will be paid from the principal amount.
In SWP, the investor is liable to pay short and long-term capital gains tax.
The interest rate is the same as that on bank fixed deposits. The interest is paid monthly at
discounted value. Let's explain discounted value. The tenure of MIS plans is six months to
10 years. Banks offer 0.5 per cent higher interest to senior citizens. At present, the post-
office MIS rate is 8.5 per cent.

However, the interest earned is taxed, substantially reducing the posttax return of people in
higher tax brackets.

For instance, if the annual rate of return is 8.5 per cent and the person is in the 30 per cent
tax bracket, the post-tax return will be less than 6 per cent (5.95 per cent to be precise).

MIS is, therefore, ideal for people whose taxable income is either less than Rs 2.5 lakh
(threshold for senior citizens) or who fall in the 10 per cent tax bracket.
 Mutual Fund (MIP)
As mentioned earlier, bank MIS plans are not tax-efficient for those who fall in 20 per cent and 30 per cent tax brackets
as a big chunk of the interest earned is taxed.

To get past this problem, one can invest in monthly income plans (MIPs) of mutual funds. MIPs invest in debt
(majority) and equity. Their objective is to offer regular income through periodic (monthly, quarterly or half-yearly)
dividend payouts.

However, the frequency and quantum of payouts vary according to the returns generated by the fund and the available
corpus. The objective of MIPs is the same as that of bank and post-office MIS.

MIPs, however, have the potential to generate better returns than bank MIS as they invest 10-15 per cent corpus in
stocks. MIPs are more tax-efficient than MIS. Since stocks comprise less than 65 per cent of the portfolio, they are
categorised as debt funds and taxed accordingly.

So, long-term capital gains are taxed at 10 per cent without indexation and 20 per cent with indexation. Indexation is
adjusting the cost of purchase with inflation. This increases the purchase cost and reduces the tax burden. Short-term
capital gains are taxed at the normal income-tax rate.
Dividends are taxed at 12.5 per cent, but not in the hands of investors.
 Senior Citizen Savings Scheme
(SCSS)
Individuals older than 60 years or those who are above 55 but less than 60 and have retired under a
voluntary retirement scheme can invest in the scheme. A person can open more than one SCSS account,
but the total investment cannot exceed Rs 15 lakh. The tenure of the scheme is five years, extendable
for three years.
At present, the scheme is offering an annual interest of 9.3 per cent. The interest is paid quarterly and is
clubbed with income for taxation. Tax is deducted at source if the annual interest is more than Rs
10,000.
If one total annual income is less than the income-tax threshold of Rs 2.5 lakh, he/she can avoid paying
tax by submitting Form 15H.
Investment in SCSS qualifies for deduction under Section 80C. This reduces the taxable income.
One can close your SCSS account after one year but before two years by paying 1.5 per cent of the
deposit amount and after two years but before maturity by paying 1 per cent of the deposit amount.
 Insurance Annuity Plans
Annuity products of insurance companies can be another source of regular income.
One pay a lump sum and decide the frequency and quantum of payouts.

The insurer decides the premium or the lump sum based on the prevailing annuity
interest rates, age and the annuity amount (payout). The annuity amount is guaranteed
for life. Annuity rates are usually benchmarked to medium or long-term government
bonds.

For example, if you are 60 and want Rs 10,000 every month, you will have to pay the
insurer Rs 13 lakh. The minimum and maximum age for buying an annuity can be
40-100 years.
Though investments in annuity schemes of insurers are eligible for
income-tax deduction under Section 80CCC, one have to pay tax on
annuity payments if they exceed the income tax exemption limit.

If one income does not cross the tax exemption limit after the addition
of the annuity amount or falls in the 10 per cent tax bracket, annuity
can be a good option as it guarantees regular life-time income.

But there is one negative point. The initial investment is high, between
Rs 5 lakh and Rs 15 lakh, if you want a decent monthly income (Rs
5,000-10,000).
 Reverse Mortgage Loan
If one’s retirement corpus is not enough to generate decent regular income to meet
his/her post-retirement expenses, one can fall back on his/her house.

One can take a loan against his/her home by mortgaging it with a lender
(banks/housing finance companies) and receive a lump sum or periodic payments.

Since the payments are in the form of a loan, they are exempt from tax.

"Reverse mortgage is a good source of income. It gives senior citizens an option to

earn regular income without giving up the ownership of the house," says Kapil
Narang, chief operating officer, Ameriprise India.
 Medium, Short-term
For short- and medium-term investments, you can opt for fixed
maturity plans (FMPs) of mutual funds, which are close-ended debt
funds with tenures ranging from three months to three years.

Close-ended schemes cannot be redeemed prematurely, but as they are

listed on stock exchanges, one can buy and sell units there.

If one want to invest for a year or more, FMPs are more tax-efficient
than bank fixed deposits, especially for those in the higher tax brackets
of 20 per cent and 30 per cent.
While interest earned on bank and corporate FDs is taxed according to
the individual's income-tax slab, long-term (one year or more) capital
gains from FMPs are taxed 10 per cent without indexation and 20 per
cent with indexation.
Often mutual funds launch FMPs with tenures of just over one year
such as 370 days and 375 days. These help investors benefit from
double indexation.

This means capital gains are adjusted for inflation twice, once in the
year of investment and then in the year of maturity.

If one income is less than the income tax exemption limit, he/she can
also invest in bank and corporate FDs
 Walking A Tightrope
At times, how much tax you save can be as important as how much
you generate from your investments. Post-retirement can be that
time.

You must evaluate your tax liabilities before selecting the investment
options. Try and strike a balance between tax-saving, income
generation and safety.

You have to walk a tight rope between playing it safe and playing it
sensibly.