One thing in common unites almost every formally-employed and salaried adult worldwide — we all hate paying taxes. Once a year, we all pause in our daily routines, file our taxes, and curse the government for putting its grubby paws on our hard-earned money.
The pains of paying taxes don’t stop even after you become a senior citizen. This is where the brilliance of tax-saving investments comes in. By investing your money in strategic investments like ELSS funds, fixed deposits, NPS, and others, you can save quite a bit on your tax liability.
In this blog, we will discuss the best tax-saving investments for senior citizens.
Importance of tax-saving investments for senior citizens
Earlier, we would live a more frugal lifestyle. Most people would scale back their expenses after retirement, and reduce their spending. In all fairness, back then, jobs were a lot less demanding. People probably weren’t waiting for their retirement with bated breath.
Now, however, our lifestyles have changed. People don’t just want to keep saving after retirement. We work hard all our lives so that we can travel and have good experiences. Everything that you put off because of work — after you retire, you can check all of it off your list. In fact, you might actually end up spending more after you retire.
The only way to ensure you can do that without constantly worrying about money is to plan out your finances well in advance. Look for smart investment options which are also tax-saving in nature.
The importance of tax-saving investments for senior citizens is twofold. Firstly, it ensures that you reduce your tax liability. Secondly, it ensures that you lock in your tax-free returns early on and make your financial plan as accurate as possible.
Let’s see what the best tax-saving investments are for senior citizens.
Best tax-saving investments for senior citizens
1. ELSS Funds
ELSS (Equity Linked Savings Scheme) funds are a specific type of tax-saving mutual fund that invests primarily in equity shares of companies. These funds are considered one of the best investment options for senior citizens looking to save on taxes while also achieving long-term capital growth.
One of the main benefits of ELSS funds is that they offer a tax deduction of up to ₹1.5 lakhs each year under Section 80C of the Income Tax Act.
Another advantage of ELSS funds is that they have a lock-in period of three years, which means that investors cannot withdraw their funds before the completion of this period. Apart from that, as ELSS funds invest in the stock market, these investments are considered long-term if held for more than one year. This means they are taxed at 10% without indexation.
Now mutual funds are good investment options because they are diversified, which means that you can invest in a variety of assets without having to worry about the risk associated with individual stocks or bonds. Another advantage of mutual funds is that they are easy to buy and sell, which makes them a highly liquid investment option.
2. Fixed Deposits
Fixed deposits (FDs) are a popular investment option among senior citizens. This is mainly due to their low-risk nature and guaranteed returns. FDs are considered to be extremely safe. And to top it off, they are also convenient. You can easily invest in FDs with your local bank or even post offices, which offer higher interest rates.
Bonus points if you go for an FD with a lock-in of five years. The interest earned on them is taxable as per the investor’s income tax slab. But you can claim tax benefits under Section 80C.
As an added benefit, some banks and financial institutions also offer higher interest rates on FDs for senior citizens. To invest in a tax-saving FD, all you need to do is visit your bank and fill out the necessary paperwork.
You can provide their KYC details, such as your PAN card and Aadhaar card. The investment amount can be paid through a cheque or online transfer.
3. National Pension System
The National Pension System, or NPS is a government-backed retirement savings scheme. It is a voluntary, defined contribution retirement savings scheme designed to provide pension income to its subscribers upon retirement. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), and it is available to everyone in India.
If you’re a citizen, you’re automatically eligible.
NPS offers tax benefits to senior citizens. Under Section 80CCD(1B) of the Income Tax Act, you can claim an additional tax deduction of up to ₹50,000 per financial year on contributions made to the NPS. This is apart from the ₹1.5 lakhs that you can claim under Section 80C.
Plus, it’s designed to fit your needs. At retirement, you can withdraw a portion of the corpus as a lump sum and use the remaining amount to purchase an annuity. The annuity provides a regular income stream for the rest of your life. You can withdraw up to 60% of the amount completely tax-free.
To invest in NPS, you must open an account with a Point of Presence (PoP) or through eNPS. You can choose which asset classes you want to invest in. If you’re unsure which choice will be more appropriate, you can also go for the Auto Choice option.
Unlike the Active Choice option, where you choose your own asset allocation and investment strategy, Auto Choice does it for you. Your age determines the asset allocation. As you get older, the allocation to equity decreases, and the allocation to debt and government securities increases.
4. Public Provident Fund
The Public Provident Fund or PPF is a government-backed savings scheme that offers certain tax benefits. You can invest up to ₹1.5 lahks in PPF each year and earn tax-free interest.
PPF has a lock-in period of 15 years, which means that the invested amount cannot be withdrawn before the completion of 15 years. But, if you’re over 60, you can withdraw the entire amount, including the interest earned, anytime after 5 years from the account opening.
Now, the reason why PPF is so popular even though it has a high lock-in period is because of the high interest rate. As of March 2023, the PPF interest rate is 7.1% annually.
You can open a PPF account at any post office or authorized bank. You can also transfer your existing PPF account from one bank to another.
How to choose the right tax-saving investment option for senior citizens
It isn’t enough to just choose a good investment portfolio. The amount of tax levied will cut into your returns and can have quite a significant impact on your realised profit.
Now, regarding the range of tax-saving investments, you have a few options to choose from — ELSS funds, FDs, NPS, and more.
So how should you make your choice?
We’ve compiled a list of some factors you should consider to help you make your choice.
1. Investment Goals
Defining your investment goals will help you set parameters for the success of your investment portfolio. For instance, are you looking for just tax benefits? Or are you also looking for long-term capital growth and income generation?
Mutual funds are always a good option, but you should create your portfolio depending on your specific goals and requirements.
2. Risk Tolerance
Now, senior citizens should opt for low-risk investments. But even then, you can choose from several different types of mutual funds.
If your risk tolerance is absolutely minimal, maybe safer investment options like FDs will be a better fit than tax-saving mutual funds. If your risk tolerance is on the higher side, you can definitely opt for some equity component in your mutual fund portfolio.
3. Investment Horizon
Your investment horizon will determine your choice of investment asset. If you have a higher investment horizon, you can afford to include some ELSS funds in your portfolio. Alternatively, you can lock in an FD with a higher interest rate.
But, if you have a shorter investment horizon, ELSS funds are not the right option for you. They have a lock-in period of three years. This means that investors cannot withdraw their funds before the completion of this period.
Conclusion
Now, you only have one investment portfolio. It’s best to make it as multifunctional as possible. If you can incorporate investments that have a dual benefit of tax saving, go for it! It will definitely help in the long run.
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
