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Tax Planning for Retired People

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Tax Planning is not limited to one's personal tax saving, it involves the complete family and all stake holders like children, parents, spouse etc.

 

Retirement is a stage where the main requirement of retired person is to generate regular income from the savings and Retirement benefits accumulated in the past working years. Some part of monthly requirement gets taken care by Monthly pension and balance has to be supplemented through other ways. Thus you may say that retirement is a very sensitive stage from money management point of view too. Where the target is to protect money from Taxes and retain the purchasing power, there it also needs to be protected from bank relationship managers, where the savings and benefits has been deposited with. The lumpsum amount received after retirement gives a natural high to the Retired and this makes him/her a gullible investor, which bankers or general products sellers take advantage of by using "Privilege customer" or "Uncle Ji" strategy. As they say, mixing driving and drinking can be risky to your life, same way mixing emotions with investments can be risky to your money management.

Tax Planning tips to generate regular income

Almost all the instruments which are used to generate regular income are taxable in nature, so tax saving part is a bit difficult at this stage. Pensions, Annuity, bank Fixed deposits interest, Senior citizen saving scheme, Post office MIS etc. all instruments generate Taxable income., thus there's nothing much one can do. If you had done good tax planning in the initial stages of life and has different tax files in the family (like of spouse, HUF) then Tax planning at this stage would be much easy. But still there are few ways which if used can reduce the tax liability for retired people.

Pension is 100% taxable. But retirement benefits should be invested in such a manner so it can supplement the monthly inflow of money and also does not increase the tax liability to the extent possible. Divide the complete amount of lump sum retirement benefits in 3 buckets.

1. First bucket to be used to generate fixed regular income which should be parked in safe and fixed interest instruments like Bank Fixed deposits or senior citizens scheme. These instruments are 100% taxable. But we can't take risk with our regular cash flow requirement just to save taxes. And many of such instruments are part of Tax saving u/s 80C.

2. Use Systematic withdrawal Plan: The second bucket should be to supplement the first bucket resources as and when required. This can be used to increase the inflow to manage the rise in expenses due to general inflation. Here the money will be parked in debt mutual funds or debt oriented hybrid mutual funds like MIPs (Monthly Income Plans) and apply systematic withdrawal plan to generate regular inflow. SWP is much better than Dividend payouts as SWP results in booking of capital gains which are more tax effective due to indexation benefit after 1 year than getting the dividend payout which are taxed at 25% plus surcharges.

3. Third Bucket can be used for medium to long term parking of funds. This bucket to be used to supplement the deposits of Bucket 2. Invest money for 5-7 years in equity oriented hybrid funds or equity funds and switch the profits booked or dividends received time and again to bucket 2 investments. Dividends received or long term capital gain from Equity oriented mutual funds funds are tax free in nature. This bucket can also be used to make tax saving u/s 80C which generally be in lock in for 3-5 years.

How much to park in which bucket depends on your cash flow requirement. Also besides investments one should have adequate insurance coverage with them. Health insurance premium will give tax deduction of upto Rs 20000/- to senior citizens u/s 80D

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