How should a 60-yr old invest Rs 30 lakh? Ideal options for senior citizens

Generating a regular income from an accumulated corpus can help lead a comfortable post-retirement life. Since it is all they have, senior citizens usually prefer the conservative route. They also prefer their investments to be liquid enough for use in an emergency. So how and where should retirees invest?

Calculate actual need: 

"Before deciding where to invest, it is crucial to calculate the actual need. Estimate how much you would need every month. Take into account any income you may have from other sources, like the rental income, pension or your heir contributing regularly. Check what percentage of the total corpus you plan to consume every year. If it is more than 4-6 per cent, bring down your expectations. For example, if you have a corpus of Rs 1 crore, the annual withdrawals should not exceed Rs 6 lakh. If you plan to withdraw more than 6 per cent of the total corpus in a year, you risk battling lower income during the later post-retirement years," said Dhirendra Kumar of Value Research in a note. 

Do not ignore inflation: 

If Rs 50,000 is enough to meet the monthly expenses today, that may not be the case five, 10 or 15 years hence, and you would need much more. Considering the same, retirees must work on a plan that helps them generate inflation-adjusted income over the years. And contrary to what many believe, that is why they must invest in equities even after retirement.

How much to invest in equity? 

You don't have to invest all your money in equities. "Just a tiny portion, say 30-40 per cent, meant for the long term. And the rest can be in fixed-income instruments. The government-backed-guaranteed return schemes should be the first choice. These are the Senior Citizen Saving Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Post Office Monthly Income Scheme (PO-MIS). An individual can collectively invest up to Rs 34.5 lakh as the maximum possible amount. These risk-free plans give you a guaranteed income at predefined intervals - monthly, quarterly or annually," noted Value Research. 

The remaining surplus can be invested in high-quality debt funds from where you can set up a systematic withdrawal plan (SWP).

How should a 60-year-old invest Rs 30 lakh? 

Investing for regular income

If she intends to derive a regular income, then she must invest about (one-third) Rs 10 lakh in equities and the rest in fixed income. "For the equity allocation, she can invest in a good flexi-cap fund over the next 12 to 18 months. This will help her generate inflation-adjusted income for the later years of her life. Further, she should invest in Senior Citizen Savings Scheme (SCSS). This will help her derive guaranteed regular income. On a sum of Rs 15 lakh, she will be getting about Rs 28,000 every quarter. The rest of the money can be invested in good quality short-duration funds," as per Kumar.

Investing for growth: 

If is not dependent on the income from these investments, a conservative approach would be to have an asset allocation of 50:50. For fixed-income, she can opt for good quality duration funds and for equities, she can choose flexi-cap funds or even conservative large-cap fund, as per Value Research. But here, the money meant for equities should not be invested in one go. Rather, it should be split over the next 18 months to two years. Alternatively, if she is ready to take slightly more risk, then aggressive hybrid funds can be an alternative. Conservative hybrid funds invest in a mix of debt and equity, with a higher proportion in debt securities, to offer both stability and the opportunity for capital appreciation.

" Senior citizens should opt for funds with a consistent performance history, low expense ratios, and alignment with their risk appetite. Consulting with a financial advisor to tailor a mutual fund portfolio that balances growth, income, and safety is advisable," said Chakrivardhan Kuppala, Co-founder and Executive Director at Prime Wealth Finserv.

Equity mutual funds or debt mutual funds?

If you have a long-term financial goal or you need the money after five years or more, then equity mutual funds might be the right choice. Conversely, if you have a short-term financial goal, then debt funds might be the right choice for you. Analysts recommend that around 60% to 70% of any senior citizen’s investment in the mutual fund space should be in a debt fund. Equity funds may pose risks, and only a small amount of capital should be allocated to these.

Tax on mutual funds

The taxation of debt funds does not depend upon the seniority of the assessee, which means no special privelages for senior citizens. Moreover, indexation benefits will not be available for LTCG on gold mutual funds, hybrid mutual funds, international equity mutual funds, and funds of funds anymore. Apart from these MFs, the funds redeemed after 36 months will be taxed at 20% on the Long Term Capital Gains along with the benefit of indexation.

"For the mutual funds, being debt-based, sold after 36 months it will be taxed at 20 per cent on long-term capital gains, and for the mutual funds, being debt-based, sold within 36 months it will be taxed as per the applicable slab rate basis. For mutual funds, being equity-oriented, sold after a period of 12 months it will be taxed at the rate of 10% on the Long Term Capital Gain after a threshold exemption of Rs.1 Lakh on such gain. For mutual funds, being equity-oriented, sold within 12 months it will be taxed as per the applicable slab rate basis," said Alay Razvi, Partner ( Accord Juris LLP, Hyderabad)

Fixed instruments 

The Senior Citizen Savings Scheme (SCSS): offers a guaranteed return (currently 8.2%) for individuals above 60. However, it's important to be aware of tax implications on both the interest earned and potentially the maturity amount. 

If a senior citizen invests Rs 15 lakh (the maximum allowed) in SCSS at an interest rate of 8.2%, the annual interest earned would be Rs 1,23,000.

Taxation: Interest earned is taxable according to the income tax slab of the individual. However, investments up to Rs 1.5 lakh in SCSS qualify for deduction under Section 80C. Additionally, under Section 80TTB, senior citizens are allowed a deduction of up to Rs. 50,000 on interest income from deposits," said Kuppala.

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Strategy: PMVVY is a pension scheme offering guaranteed returns for senior citizens. It provides a fixed income for ten years, with the option of monthly, quarterly, half-yearly, or yearly payouts. For an investment of Rs 15 lakh, the scheme offers an annual pension of around Rs 1,11,000 at the current interest rate of 7.4%. The pension received is taxable per the investor's tax slab. There is no TDS deduction, but the income is added to the total income and taxed accordingly.

"For those seeking guaranteed income with lower risk, the Pradhan Mantri Vaya Vandana Yojana (PMVVY) provides a fixed income stream for 10 years. Past interest rates ranged between 8-8.3%, but early withdrawal is not allowed. 

Short-term debt funds offer lower risk and a shorter investment period, while conservative hybrid funds combine debt and equity, providing moderate risk with the potential for growth. Remember, market fluctuations are inherent to these options," said Shruti Jain, CSO, Arihant Capital.

Post Office Monthly Income Scheme (POMIS)

POMIS provides a monthly income, suitable for senior citizens looking for a fixed income without exposure to market risks.

Example: Investing Rs 4.5 lakh (maximum limit for a single account) at an interest rate of 7.4% would yield a monthly income of Rs 2,775.

Taxation: The interest income from POMIS is added to the total income and taxed according to the applicable slab rates.

Fixed Deposits (FDs) for Senior Citizens

Many banks in India offer special FD rates for senior citizens, which are typically 0.5% to 0.75% higher than the rates offered to the general public. These enhanced rates make FDs an attractive option for ensuring a predictable income stream. "Consider a senior citizen who invests Rs 10 lakh in a special senior citizen FD offering an annual interest rate of 7.25%. The investment would generate an annual interest income of Rs 72,500. This simple, straightforward investment mechanism does not involve market risk, ensuring the principal amount remains intact while generating a steady income," said Kupalla.
 

Tax-Saving Tips:

1. Utilize the Rs 50,000 deduction available under Section 80TTB on interest income from deposits.
2. Invest in tax-saving options like SCSS and PMVVY, which offer deductions under Section 80C.

"For senior citizens in India, a combination of SCSS, PMVVY, POMIS, FDs, and carefully selected mutual funds can form a robust investment strategy. This strategy not only ensures a regular income stream to meet daily expenses but also offers potential tax savings. By understanding the taxation rules and choosing investments wisely, senior citizens can maximise their post-retirement financial security and maintain a comfortable lifestyle," said Kupalla.