Slow but steady growth

After retirement, aim to minimise the tax on withdrawals or on interest from investments and stick to the conservative tax-saving instruments.

Print Edition: January 22, 2009

If only the taxman retired with you. Unfortunately, even when you no longer go to work, he will continue to knock at your door. This does not disturb 61-year-old P. Mukherjee. He retired from Coal India in 2007 and gets a pension of Rs 1.2 lakh a year, which is well within the tax-free limit. The lump sum that he received at the end of his career was used to repay a home loan and an education loan. So financially speaking, he is foot loose and fancy free. The catch is that the situation might change.

The DDT Disadvantage
Amount invested in a debt fund: Rs 10 lakh
Tax-free dividend received: Rs 50,000 per quarter
Dividend distribution tax*: 20%
Reduction in corpus due to DDT: Rs 10,000
The SWP Advantage
Amount invested in debt fund: Rs 10 lakh
NAV at the time of purchase: Rs 10
NAV at the end of quarter: Rs 10.50
SWP: Rs 50,000 per quarter
Your profit: (Rs 50,000 / Rs 10.50) X 0.50 = Rs 2,400
After the first year, LTCG tax is 10% of profit: Rs 240
*The dividend distribution tax is an approximate figure and varies across fund types.

Mukherjee is a chartered accountant and has started a private practice. His current income is small, but it is expected to spurt in a year or two. Combined with his pension, it will breach the Rs 2.25 lakh mark annually. Then the taxman will be back.

The problem is that tax cuts hurt more at this age as your income is lower than that in your pre-retirement days. If you invest in the wrong tax-saving instruments, the pain worsens. But there is good news. With some smart financial manoeuvres, you can blunt the ruthless tax assault.

Let’s first deal with the lump sum that lands in your lap at retirement. This could be the accumulated provident fund, gratuity or commuted pension. One-third of the commuted pension from a private employer is tax exempt if you also receive gratuity. If not, then half of the amount is exempt. Your aim is to ensure steady cash flows and lowest possible tax on the income from the investment of the lump sum. Along side, you must stick to the asset allocation of your overall portfolio. To achieve all these objectives, we suggest a customised combination of investments in balanced and debt funds, fixed deposits, monthly income plans and the senior citizens savings scheme.

Pradeep B., a 50-year-old officer in the Indian Army, plans to take voluntary retirement after four years. He will receive a lump sum of Rs 30 lakh and a monthly pension of Rs 25,000. As none of his financial goals will extend into the period of retirement and because he has no loans, Pradeep can afford more risk than his counterparts. So P.V. Subramanyam, financial trainer, Iris, suggests that he invest about Rs 10 lakh in a debt-based balanced fund. He can withdraw this money via a systematic withdrawal plan (SWP) after one year of investment. The profit from SWP is taxed at a flat rate of 10% or at 20% after indexation. This is much lower than the dividend distribution tax of about 20% that is paid by the fund houses but passed on to the investor in the form of lower NAV of the fund. If you do not have any pension or if there are any unfulfilled goals, invest a lower portion of the lump sum in equities.

Instead, you can put the money in a senior citizens scheme which earns an interest of 9%. Subramanyam suggests Pradeep invest Rs 10 lakh in this option for secure returns. This investment qualifies for the Section 80C exemption but the income from it is taxable. A monthly income scheme (MIS) has similar tax features but has the advantage of streamlining cash flows. Hence, Pradeep has been advised to invest the balance Rs 10 lakh in this scheme—a good option for almost all retirees.

Now, about the best instruments for saving tax on the postretirement income. Steer clear of ELSS as it will increase the risk of your portfolio. If you can afford the risk, then limit your ELSS intake to 20-30% of total investments.

Ulips are also a bad idea at this age. You should not require any additional insurance cover as most of your responsibilities will be nearly over. If it is not so, you ought to have bought a term plan as it is cheaper. The premium can account for 10-20% of the Rs 1–lakh exemption. Ulips also score low because of their high upfront cost and minimum term of payment of three to five years. Also, they give good returns only after 12-15 years, which is too long a wait at this age.

Pension plans are also avoidable as you have reached the stage when you should enjoy the benefits of such a plan. However, you can continue to invest in such a plan for three-four years into retirement. Five-year fixed deposits are one of the most conducive tax-saving instruments for retirees. When you invest every year, fixed deposits automatically create a ladder of maturity that is very crucial for your cash flows in the later stages of retirement.

If you have just left work and have a Public Provident Fund (PPF) account, then maximise your investments in them. You can also claim a deduction of Rs 15,000 (for senior citizens) from your health insurance premium. In case you plan to reverse mortgage your house, the income will not be taxable.

The idea is to choose safe taxsavers that will not rock your dream of a calm retirement.

Deepak Kumar Rajput

Case Study

Deepak Kumar Rajput (left), 54, Delhi

Does not invest in equities as he thinks it is very risky. Plans to live off his pension and rental income after retirement.

Income: Rs 20,000 per month

Current asset allocation: As he has never invested in equities, the absolute value of his portfolio is low.

Real estate: 79 per cent, Debt: 21 per cent

His tax plan for 2008-9
Section 80CHis plan (Rs)Our suggestion (Rs)
Pension PlanNilNil


  1. Rajput has never invested in equities, but it is not too late to start. A small portion of ELSS will accelerate the growth of his portfolio and save tax. He should choose only five-star rated funds to play safe.
  2. He should start investing in fixed deposits every year. This creates a ladder of maturity that will reduce the strain on his future cash flows. It is also a safe investment.
  3. He can continue with the insurance till the end of its tenure.

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