Q. I am a 61-year-old retired government employee. I have recently retired and have a large amount at my disposal and my children are financially independent. I intend to invest my funds into tax saving investment options, however, I am unsure about various tax - saving investment options available for senior citizens like me. Ideally I will like my investment to generate dividend/interest income at regular intervals so that it can augment my pension. Further, since I am retired my risk appetite is quite low. Can you please elaborate on tax-saving investment for senior citizens.
As a senior citizen, you may be looking for ways to reduce your tax liability and save money for your retirement. There are various tax saving investments that you can choose from, depending on your risk appetite, income level and financial goals. We will explain some of the most popular tax saving investments for senior citizens in India and their benefits.
Senior Citizens Savings Scheme (SCSS)
SCSS is a government-backed scheme that offers a fixed interest rate of 8.2% per annum (as on date 03.07.2023), payable quarterly. The scheme has a tenure of 5 years, which can be extended by another 3 years. SCSS has several features and benefits that make it an attractive investment option for senior citizens. Some of them are:
- Secure investment: SCSS is backed by the Government of India and hence offers guaranteed returns and safety of the principal amount.
- High interest rate: SCSS offers one of the highest interest rates among fixed-income small savings schemes. The current interest rate for SCSS for the first quarter (April-June) of FY 2023-24 is 8.2% per annum. The interest rate is reviewed quarterly and is subject to periodic change.
- Quarterly interest payment: The interest on SCSS is calculated and credited quarterly on the first date of April, July, October and January. The interest can be directly transferred to the investor's savings account or withdrawn from the Post Office or bank branch.
- Tenure: The maturity period of SCSS is 5 years from the date of opening the account. However, the investor can extend the tenure for another 3 years by submitting an application within one year of maturity.
- Tax benefit: The investment in SCSS is eligible for deduction under Section 80C of the Income Tax Act up to Rs. 1.5 lakh per annum. However, the interest earned on SCSS is taxable as per the investor's income tax slab rate and is subject to TDS if it exceeds Rs. 50,000 per annum.
- Nomination facility: The investor can nominate one or more persons as beneficiaries of his/her SCSS account either at the time of opening the account or later.
- Premature withdrawal facility: The investor can withdraw his/her SCSS deposit before maturity subject to certain conditions and penalties. The penalty for premature withdrawal is 1.5% of the deposit amount if withdrawn before completion of 2 years and 1% if withdrawn after completion of 2 years.
Tax Saving Fixed Deposits (FDs)
Tax saving FDs are fixed deposits that have a lock-in period of five years and offer tax deduction up to Rs. 1.5 lakh per financial year under Section 80C of the Income Tax Act. This means that you can reduce your taxable income by the amount you invest in these FDs, subject to the overall limit of Rs. 1.5 lakh. However, you cannot withdraw or break these FDs before the completion of five years, except in case of death of the depositor. The interest rate on tax saving FDs varies from bank to bank, but it is usually lower than SCSS. The interest income from tax saving FDs is taxable as per your tax slab.
Public Provident Fund (PPF)
PPF is a long-term savings scheme that offers an interest rate of 7.1% per annum, compounded annually. The scheme has a tenure of 15 years, which can be extended by another 5 years. The minimum investment amount is Rs. 500 and the maximum is Rs. 1.5 lakh per year. The interest income and the maturity amount from PPF are tax-free. Key features of PPF are are as follows:
- PPF is a long-term investment scheme that has a tenure of 15 years, which can be extended for another 5 years. The scheme is backed by the Government of India, which means that your money is secure and guaranteed. You can open a PPF account with any post office or authorised bank in India, and deposit a minimum of ₹ 500 and a maximum of ₹ 1.5 lacs per financial year. You can make up to 12 deposits in a year, either in lump sum or in instalments.
- One of the main advantages of PPF is that it offers attractive interest rates that are compounded annually and paid in March every year. The interest rate is decided by the Ministry of Finance every quarter, and is usually higher than the inflation rate. For example, the current interest rate for the quarter ending December 2023 is 7.1% per annum. The interest is calculated on the lowest balance between the close of the 5th day and the last day of each month.
- Another benefit of PPF is that it offers tax benefits under Section 80C of the Income Tax Act, 1961. The amount that you deposit in your PPF account, up to ₹ 1.5 lacs, is eligible for deduction from your taxable income. Moreover, the interest that you earn on your PPF account is also exempt from tax. This means that PPF is an EEE (Exempt-Exempt-Exempt) scheme, where you do not have to pay any tax on the principal, interest or maturity amount.
- PPF also allows you to withdraw money from your account after completing 5 years from the end of the financial year in which you opened your account. You can withdraw up to 50% of the balance at the end of the fourth year preceding the year of withdrawal or at the end of the preceding year, whichever is lower. You can also avail loans against your PPF account from the third year to the sixth year of opening your account. The loan amount can be up to 25% of the balance at the end of the second year preceding the year in which you apply for the loan.
These are some of the tax saving investments that you can consider as a senior citizen in India. However, before investing in any of these schemes, you should assess your financial situation, risk tolerance and liquidity needs and consult a financial advisor if needed.
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Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.