Tax Planning TIPS for Retired People

tax planning tips for retired

Earlier I wrote a series of articles on tax planning tips for different Life Stages. Those articles covered topics on tax planning tips for youth, tax planning tips for a Young couple and tax planning tips for Parents. I somehow skipped the next stage i.e. of Retired people. So here I am with the 4th and last article of the series tax planning tips for Retired people”.

Before going ahead I would like to summarize what I wanted to convey and have conveyed in the earlier articles on Tax Planning tips

1. Tax Planning is a broader term than “Tax saving”. Tax saving is a Part of Tax Planning.

2. The whole concept of tax Planning revolves around 4 golden rules that say:

a)      Spreading the taxable income among various family members.

b)      Taking full advantage of Tax exemption available.

c)       Taking full advantage of Tax deductions available.

d)      Optimum use of Tax-exempted income.

3. Tax Planning is not limited to one’s personal tax saving, it involves the complete family and all stakeholders like children, parents, spouse etc.

Retirement is a stage where the main requirement of a retired person is to generate regular income from the savings and Retirement benefits accumulated in the past working years.

Some part of the monthly requirement gets taken care by Monthly pension and balance has to be supplemented through other ways.

Thus you may say that retirement is a very sensitive stage from a money management point of view too.  Where The target is to protect money from Taxes and retain the purchasing power, there it also needs to be protected from missellers and bankers, where the savings and benefits have been deposited with.

The lump sum amount received after retirement gives a natural high to the Retired and this makes him/her a gullible investor, which bankers or general products sellers take advantage of by using “Privilege customer” or “Uncle Ji” strategy.  As they say, mixing driving and drinking can be risky to your life, the same way mixing emotions with investments can be risky to your money management.

Tax Planning tips to generate regular income

Almost all the instruments which are used to generate regular income are taxable in nature, so tax saving part is a bit difficult at this stage. Pensions, Annuity, bank Fixed deposits interest, Senior citizen saving scheme, Post office MIS etc. all instruments generate Taxable income., thus there’s nothing much one can do.

If you had done good tax planning in the initial stages of life and has different tax files in the family (like of spouse, HUF) then Tax planning at this stage would be much easy. But still, there are few ways which if used can reduce the tax liability for retired people.

The pension is 100% taxable. But retirement benefits should be invested in such a manner so it can supplement the monthly inflow of money and also does not increase the tax liability to the extent possible. Divide the complete amount of lump sum retirement benefits in 3 buckets.

1. First bucket to be used to generate fixed regular income which should be parked in safe and fixed interest instruments like Bank Fixed deposits or senior citizens scheme.  These instruments are 100% taxable.

But we can’t take a risk with our regular cash flow requirement just to save taxes. And many of such instruments are part of Tax saving u/s 80C.

2. Use a Systematic Withdrawal Plan: The second bucket should be to supplement the first bucket resources as and when required.

This can be used to increase the inflow to manage the rise in expenses due to general inflation. Here the money will be parked in debt mutual funds or debt oriented hybrid mutual funds and apply systematic withdrawal plan to generate regular inflow.

SWP is much better than Dividend payouts as SWP results in the booking of capital gains which are more tax effective due to indexation benefit after 3 year than getting the dividend payout which is taxed at 25% plus surcharges.

(Read:How SWP works in mutual funds?)

3. Third Bucket can be used for medium to long term parking of funds. This bucket to be used to supplement the deposits of Bucket 2. Invest money for 5-7 years in equity-oriented hybrid funds or equity funds and switch the profits booked or dividends received time and again to bucket 2 investments.

Dividends received or long term capital gain from Equity oriented mutual funds are taxed at 10% only. This bucket can also be used to make tax-saving u/s 80C which generally be in lock-in for 3-5 years.

(Read: Asset allocation through hybrid funds)

How much to park in which bucket depends on your cash flow requirement. Also besides investments, one should have adequate insurance coverage with them. Health insurance premium will give tax deduction of upto Rs 50000/- to senior citizens u/s 80D

Some other important tax planning tips

4. Be sure to keep all investments in joint name with Anyone or survivor mode of operation, and should have clearly specified nominees. Never invest any amount in the name of your grand children or any other relative in general (as this will specifically be advised by bankers and insurance sellers).

From practicality angle never lose control of your money. If at all you want to do something for your children or grandchildren, write down a proper will and bequeath whatever you want to. In short Do proper estate planning.

(Read : Is Joint account holding better than appointing nominees)

(Also Read : Nominations make wealth distribution easy)

(Read: save taxes with HUF)

6. Create different tax files through WILL: As per income tax law, any gift given by way of a will or received an inheritance does not attract any kind of tax. You can do a favor to your kids by doing some tax planning on their behalf. You can create different tax files like in the name of your Daughter in law, Grandchildren, HUF, Private Trust etc. through your Will and bequeath your Assets in them.

(Read: Role of WILL in Estate Planning)

(Also RRead:How private trusts help in protecting managing and distribution of estate)

Taxes and Inflation are two holes in any investments pocket. Inflation is not in your control, but by proper tax planning, you can considerably reduce the tax outflow. Hope tax planning tips mentioned above will be helpful.

If you have some other Tax Planning Tips in mind, which I have missed do share.

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He’s MBA ( Finance) gold medalist, a CERTIFIED FINANCIAL PLANNER, Chartered Trust and Estate Planner and SEBI Registered Investment adviser. He has authored a Book in collaboration with CNBC TV 18 Network 18 bestesellers , tiltled "The Art of Being Good with Money". An ex banker , having a 17+ years of long experience in financial services industry he manages clients across the globe. He is a regular contributor to various leading Media and publication houses. He has written for Moneycontrol, Dainik bhaskar, Business standard, Live mint, Indian Express, The Tribune etc. He has also appeared in TV shows by Zee Business, ET Money, National Door darshan, Jagran Online. He also delivers training on Various personal finance topics to various corporate houses. You may get in touch with him at [email protected]



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