Without any regular income after retirement, senior citizens prefer to park their money in a safe way so that they may earn a decent return without putting the capital money they get as retirement benefit at risk. So, despite tax and inflation efficiency, they avoid risky products like mutual funds, and invest in guaranteed products like bank fixed deposits (FDs).
However, the older generation was a worried lot as taxes were eating up their income as interest on FDs is taxable and the rates of interests were also low last year. Although the level of inflation was low at that time, but falling returns made them nervous. In fact, the returns on FDs move closely along the rate on inflation. So, when the level of inflation falls, the interest rate on FDs also falls and vice versa.
As the risk-free interest rate remains just over the rate of inflation, FDs fail to beat inflation after the tax is deducted from the return. So, in the long run, the amount invested in FDs actually fail to keep the purchasing power intact. Still, senior citizens prefer FDs as the devaluation is gradual and the principal doesn’t fluctuate giving them tension.
However, the senior citizens may now cheer as apart from revival in interest rates, the government has decided to give them exemptions up to Rs 50,000 on the interest earned on FDs from this financial year. This will make them pay lesser tax and give their preferred mode of investment some teeth to fight inflation.
As the current rate of interest for senior citizens on FDs is hovering around 7-8 per cent on 5-year deposits, elderly persons may invest Rs 6.25 lakh in an FD giving 8 per cent interest to earn tax-exempted interest of Rs 50,000. On the other hand, a senior citizen may invest about Rs 7.14 lakh to earn the tax-exempted interest of Rs 50,000 if the interest rate is 7 per cent.
Apart from the tax exemption on interests, senior citizens may also avail tax benefits u/s 80C on investments up to Rs 1.5 lakh, as 5-year FDs qualify for this benefit.
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Source: Financial Express