Tax Planning For Senior Citizens: Liquidity, Income, Returns

Senior citizen taxpayers have different needs than others so their tax planning should be in accordance with their current and future requirements.

In this age group, one may not have goals such as investing in Employees’ Provident Fund (EPF) or saving for children’s education or home loan repayment. Even life insurance premiums may not be relevant in many cases as only a few people have financial dependants at this stage. The focus would, therefore, be on low-risk investments and regular income. 

Lower debt: With some responsibilities off the list, the ones remaining include settling personal debt such as personal loan, credit card dues or others (which do not offer tax benefits). Most people want to settle all this before retirement. 

Liquidity: To generate post-retirement income in a tax efficient way, people tend to invest in tax-saving instruments that offer more tax-free maturity amounts and a stable source of income. But apart from this, one must also consider liquidity of the investments. One way to do that is to convert fixed assets such as land or other property to shore up cash reserves. 

Inflation-plus returns: Senior citizens can look at small savings schemes such as tax-saving fixed deposits (FDs) and Senior Citizens’ Savings Scheme (SCSS). Both give tax benefit in the 80C basket. However, the interest earned from tax-saving FDs is taxable and, hence, the post-tax return from these tax-saving FDs usually does not beat inflation. SCSS is a government-backed retirement benefits programme in which senior citizens can invest a lump sum, individually or jointly, and get regular income along with tax benefits. 

Tax benefit on medical expenses: While other expenses reduce, medical expenses increase for this age group. A senior citizen can get tax deduction on expenditure (on self or dependent) towards specified disease or ailments, under Section 80DDB. Moreover, Rs 1 lakh or the amount paid, whichever is less, is applicable as a standard deduction for resident individuals of age 60 years or more.

Equity returns: Many people shy away from investing in equity when they are in higher age groups. However, despite the volatility, investing some amount in equities to get higher returns should be considered. Senior citizens can invest in ELSS, as long as they do not need the funds immediately. One of the biggest advantages of equity returns is that they beat inflation. Equity-linked savings schemes (ELSS) are equity products that come with 80C tax benefits. However, one must note that there is a lock-in of three years. So, if an investor can afford to wait for three years, he/she can look for a higher return on investments. 

New tax regime: Now there are two tax regimes. The older one allows various exemptions and deductions while the newer one has fewer exemptions and deductions but also lower tax slab. Therefore, the new tax regime can be an option for senior citizens if they do not have enough tax-saving avenues to invest in, depending on their circumstances. Senior citizens with only retirement income may opt for the new tax regime as they generally don’t look to make new payments to avail tax deductions. Hence, if there is not much income to show, the new tax regime works better.