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Retirement Planning

Retirement means end of accumulation phase and start of distribution phase means having no or less income and medium to high expenses. Retirement means end of earning period, unless someone chooses to work by choice or force. Post retirement one has to  make the best use of their retirement corpus that would help to keep low tax liability and provide a regular stream of income to takecare of their monthly expenses.

Retirement planning should be done considering the regular income required with more or less with  fixed income products and some or small part can be invested in Market-linked investment products. Best options for as follows.

Senior Citizens' Saving Scheme(SCSS) : SCSS is available only to senior citizens or early retirees. SCSS can be availed from a post office or a bank by anyone above 60. Early retirees can invest in SCSS, provided they do so within one month of receiving their retirement funds. The normal investment tenure is five-years, which can be further extended by three years. The interest is payable quarterly and fully taxable. The upper investment limit is Rs 15 lakh. The capital invested and the interest payout, which is assured, has sovereign guarantee and are also eligible for tax benefits under Section 80C.

Tax-free bonds : Tax-free bonds are issued by government-backed institutions such as Indian Railway Finance Corporation Ltd, Power Finance Corporation Ltd, National Highways Authority of India, Housing and Urban Development Corporation Ltd, Rural Electrification Corporation Ltd which carries highest safety ratings. One may, however, buy and sell them on stock exchanges as they are listed securities. This bonds are long-term investments and mature after 10, 15, 20 years and the liquidity is low. Invest in them only if you are sure that you will not require the funds for such a long period. The interest is tax-free therefore there is no Tax Deducted at Source too.

Post Office Monthly Income Scheme : Post Office MIS is a five-year investment scheme where you can invest uptoRs 9 lakh under joint ownership and Rs 4.5 lakh under single ownership. The interest rate keeps changing every quarter and is payable monthly. The investment in POMIS doesn't have any tax benefit and the interest is taxable.

Bank fixed deposits : Bank fixed deposits (FD) is the most reliable and popular investment option. The safety, fixed returns and the ease of operation makes it a favourite avenue. The interest rates keep fluctuating and the tenures ranging from 1-10 years. Senior citizens get an extra 0.25-0.5 per cent per annum, depending on the bank. For those looking to save tax, can do so by investing in the five-year tax saving bank FD which qualifies under Section 80C tax benefit but has lock-in period of five years and the interest income is taxable.

AAA rated Company Fixed Deposits : Investors looking for an alternative to bank deposits can also look at investing in  AAA-rated corporate fixed deposits offered by companes such as Bajaj Finance, PNB Housing Finance, HDFC Ltd, Mahindra & Mahindra and Shriram Transport Finance. The Company FD offers better returns than the Bank FD. Company deposits are available in tenures of 1, 3 and 5 years with an option to earn interest monthly, quarterly, half yearly, annually or on a cumulative basis.

Immediate annuities Plans : Immediate annuity schemes of life insurance companies are also decent option. The pension or annuity returnsshould be around 6 per cent per annum and is entirely taxable. The immediate annuity plan may not suit an investor who is capable of managing hi investment portfolio as the returns are low and corpus gets locked as it’s a rigid product.

Mutual funds: This option is equity based hence it volatile in nature and carries risk. One should look at this option only if he or she can hold it for more than 5-7 years. Depending on the risk appetite, one may allocate a certain percentage into equity mutual funds with proper guidance of certified financial distribution across large-cap and balanced funds preferably.

Debt MFs can also be a part of a retiree's portfolio if he falls under highest taxable bracket as Taxation of debt funds makes it a better choice over bank deposits. The interest on bank deposits is fully taxable as per the tax bracket, income from debt funds gets taxed at 20 per cent after indexation, if held for three years or more. A retiree can consider keeping a significant portion in debt funds also because of its easy liquidity.

Systematic Withdrawal Plan through mutual fund :- can also be used to generate regular income by withdrawing a fixed amount from a mutual fund scheme on monthly or quarterly basis. From taxation point of view, SWP works better than Dividend option because Dividends are subject to dividend distribution tax, while capital gains up to Rs 1 lakh in a financial year are tax free in the hands of an investor. Besides, dividends cannot be guaranteed by a mutual fund and is subject to market conditions, distributable surplus and profits made by a scheme. Compared to this, SWP is more reliable than the dividend plan.