Budget 2018 – Why Senior Citizens In Lower Tax Slabs Should Opt For Fixed Deposits

Now, senior citizens can invest more and also save more.

While the Budget 2018 has disappointed many, senior citizens have several reasons to cheer. For those in the lower tax brackets (5 and 20 per cent) who don’t like the volatility that comes with equities, fixed-income instruments like fixed deposits (FDs) and Senior Citizen Savings Scheme (SCSS) have turned more attractive than debt mutual funds.

“Other than fixed-income debt instruments becoming attractive, senior citizens can now invest in Pradhan Mantri Vaya Vandana Yojana (PMVVY) that yields higher returns than fixed deposits,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

FDs attractive for lower tax brackets: Most senior citizens invest their money in fixed deposits (FD) or post office savings schemes and live off the interest earned on them. Now, they will be able to claim a deduction of up to Rs 50,000 on the interest earned on these deposits. The government has done this by introducing Section 80TTB.

If a senior citizen invests Rs 700,000 in State Bank of India’s FD that carries 6.75 per cent, he will make Rs 47,250 a year and doesn’t need to pay any tax on it. Those investing in Post Office SCSS at the interest rate of 8.3 per cent also don’t need to pay tax on Rs 600,000 worth of investment.

“While those in the 30 per cent tax bracket can also have investment in FDs up to Rs 700,000, for further investments they are better off in debt funds. Opting for regular income with a systematic withdrawal plan (SWP) is more tax efficient than monthly income through an FD,” says Deepesh Raghaw, founder, PersonalFinancePlan.in. Suppose you invest Rs 700,000 in a debt fund and get 7,000 units. When you withdraw partial units, there will be short-term capital gains tax only on the gains you have made on the withdrawn units. For those in the highest tax bracket, the tax outgo is less than what they would pay on bank FDs.

Investment scheme revamped: Last financial year the government had introduced PMVVY, which is designed to provide a regular pension to senior citizens. It was earlier open for investment until May 3, 2018. The budget has now proposed to keep it open for investment till March 2020. Apart from extending the scheme’s investment duration, the limit of Rs 750,000 per senior citizen has also been enhanced to Rs 1.5 million. A couple, if both are seniors, can double the investment amount with each one investing up to Rs 1.5 million in this scheme. But if a senior gifts money to his wife to invest in the scheme, the gains will be added to the husband’s income.

The scheme provides an assured return of 8-8.3 per cent a year, depending on the periodicity of payment. The interest earned, however, is taxable. The maximum pension that an investor can earn has now doubled to Rs 10,000 a month. This is at par with SCSS, which offers a similar return of 8.3 per cent a year. However, the interest earned in PMVVY scheme will not get the 80TTB deduction. Senior citizens should look at this scheme once they have exhausted the SCSS limit.