Kerala-based A Sofia will retire from her central government job next month. In her 29 years of service, the Kochi resident accumulated Rs 25 lakh (post-tax), which includes provident fund, gratuity, earned leave encashment and 40 per cent of commutation of pension of 12 years.
Sofia wants to invest the amount at the earliest, lest she ends up spending some of it for other purposes. Hence, she is already reading up on suitable instruments, enquiring with financial advisors and friends / relatives. Like most, Sofia does not know how to organise this process and tax liability is her biggest worry.
“Tax on retirement corpus is not a flat rate,” notes Amitabh Singh, tax partner, Ernst & Young. “It depends on taxation of various components that add up to the total amount.”
Sofia does not have any monetary commitments to fulfil after retirement. She will be getting Rs 20,000 a month as pension, enough for her expenses. She plans to travel and do some philanthropic work after hanging up her boots. For these, Sofia has been saving for very long. She has adequate health and life insurance. Therefore, she can easily invest the entire Rs 25 lakh.
But, not everyone can be in a Sofia-like situation. They may need money to meet post-retirement needs. Such individuals can keep a part of the money aside and invest the rest.
For those nearing retirement, it is advisable to invest a majority of the corpus (70 per cent) in debt. And, put the rest in equity to beat inflation. Even if the markets dip and your equity portion takes a hit, you would be fine, as majority of the money is in debt and it limits the downslide.
Since Sofia does not require income-generating investment options, Suresh Sadagopan, a certified financial planner, recommends she invests 70 per cent of her money in bank deposits (five years and onwards), tax-free bonds and only A-rated corporate deposits like from Mahindra & Mahindra (8.5 per cent for one year). Long-term bank deposits are tax-efficient under Section 80C. But, returns from both corporate and bank deposits will be taxed.
“People who are retired will have to look at investment options that protect their capital,” says Sadagopan. “It should be virtually risk-free, as they cannot recreate that money.”
Sofia can invest the rest in equity funds like equity diversified, index or large cap funds. However, she should invest in funds with a good, long-term record and trusted names. Monthly income plans (MIPs ) are another option, says Amar Ranu, senior manager (third-party products), Motilal Oswal Private Wealth. “They are a combination of both equity and debt,” he notes. “Since equity valuations are looking good and debt returns are good, MIPs are a good option.”
But those who need a regular income should invest in products that will give them that cushion. The Post Office monthly income scheme (MISs) is good, but the senior citizen savings scheme offers a higher tax-free nine per cent and an investment limit of Rs 15 lakh against Rs 1 lakh in MIS. Then, you can also opt for fixed deposit with quarterly interest payouts. These will earn you a higher rate. But, the interest payout is taxable.
Unfortunately, Sofia’s retirement at 56 means her total post-retirement income of Rs 2.4 lakh a year is taxable at 10 per cent. Those above 60, get an exemption limit of Rs 2.5 lakh. If Sofia invests Rs 1 lakh in instruments approved under Section 80C of the Income Tax Act, she will not be taxed on the taxable income of Rs 40,000 (the basic exemption for women stands at Rs 2 lakh for this financial year).
