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How can I minimize taxes and maximize monthly income on my 60 lakh retirement investment?

Ramalingam

Ramalingam Kalirajan  |8204 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 28, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Sunil Question by Sunil on Jul 15, 2024Hindi
Money

Sir,Namaste! I am retired and wish to invest retirement fund of 60 lacs. Pl suggest me options for minimum tax liability and max monthly income. I will be in 30% slab even after retirement. Thank you.

Ans: Retirement is a crucial phase where financial security is paramount. You have worked hard to accumulate Rs 60 lakhs as a retirement fund, and now the focus is on preserving this wealth while ensuring a steady monthly income with minimal tax liability. This approach will provide peace of mind during your retirement years.

Given that you are in the 30% tax slab, it's essential to make tax-efficient investments. This will maximize your post-tax returns, ensuring a comfortable lifestyle. Let's explore some strategies to achieve this goal.

1. Creating a Tax-Efficient Income Stream
The primary objective is to generate a regular income while minimizing tax outflows. Several investment options can be tailored to meet these needs.

Senior Citizen Savings Scheme (SCSS):
This is a government-backed scheme specifically designed for senior citizens. It offers a fixed interest rate, providing a predictable income stream. The interest earned is taxable, but it qualifies for a deduction under Section 80TTB, reducing your tax burden slightly.

Tax-Free Bonds:
Investing in tax-free bonds issued by government-backed entities can provide you with a tax-free income. The interest earned from these bonds is exempt from tax, which is beneficial for someone in the 30% tax bracket. Although the returns are generally lower than other fixed-income options, the tax-free nature makes them attractive.

RBI Floating Rate Bonds:
These bonds are an option to consider as they offer a variable interest rate that adjusts semi-annually. The interest is taxable, but with careful planning, you can optimize the timing of your income to reduce your tax liability.

2. Exploring Mutual Fund Options for Monthly Income
Mutual funds can be an effective tool to generate a regular income while optimizing tax efficiency.

Systematic Withdrawal Plan (SWP) in Debt Mutual Funds:
SWP allows you to withdraw a fixed amount from your mutual fund investment at regular intervals. The primary benefit here is that only the capital gains portion of the withdrawal is subject to tax, which can be lower than the tax on interest from fixed deposits or bonds. Additionally, long-term capital gains in debt funds are taxed at 20% with indexation benefits, making them more tax-efficient than other fixed-income options.

Hybrid Mutual Funds:
These funds invest in a mix of equity and debt instruments. They offer a balance between risk and return and can provide a steady income. For tax purposes, long-term capital gains from equity-oriented funds (if held for more than one year) are taxed at 10% without indexation for gains exceeding Rs 1 lakh. This can be advantageous for a retiree in the 30% tax bracket.

3. Consideration of Annuities: An Assessment
Annuities are often marketed as a secure way to generate lifelong income. However, they come with several drawbacks.

Lack of Flexibility:
Annuities lock up your capital, and the returns are generally lower than other investment options. This lack of liquidity can be a significant disadvantage if you need access to your funds.

Taxation on Payouts:
The income from annuities is fully taxable as per your slab rate, which in your case is 30%. This high tax liability reduces the effectiveness of annuities as a retirement income solution.

4. The Pitfalls of Index Funds and Direct Funds
Given the reference to index funds and direct funds, it's important to highlight the disadvantages associated with these options.

Index Funds:
While index funds are often praised for their low costs, they may not be the best choice for your retirement portfolio. Index funds track the market and do not offer the potential for outperformance. In a volatile market, this can mean lower returns compared to actively managed funds. Additionally, the lack of professional management in index funds can be a drawback, especially when you need to optimize returns to fund your retirement.

Direct Funds:
Direct funds come with lower expense ratios but require a higher level of financial expertise. Managing direct investments without professional guidance can lead to suboptimal asset allocation, especially in retirement when the margin for error is small. A Certified Financial Planner (CFP) can provide valuable insights and help you make informed decisions, ensuring your retirement corpus is well-managed.

5. Balancing Risk and Return
Retirement is not a time to take undue risks with your hard-earned money. However, avoiding all risks could result in your investments not keeping pace with inflation. Striking the right balance between risk and return is key.

Diversified Debt Funds:
These funds offer a balanced approach by investing in a mix of government and corporate bonds. They tend to provide stable returns with relatively low risk. The taxation on long-term capital gains, with the indexation benefit, can be advantageous for someone in your tax bracket.

Dividend Yield Funds:
These equity funds focus on companies with a strong track record of paying dividends. While they carry market risk, they can offer higher returns and a steady income stream. The dividends are now taxable in the hands of investors, but the overall potential for capital appreciation can offset this.

6. Building a Contingency Fund
It's essential to set aside a portion of your retirement corpus as a contingency fund. This fund will act as a buffer against unforeseen expenses and reduce the need to liquidate your investments at an inopportune time.

Liquid Funds:
Liquid funds offer easy access to your money while providing better returns than a savings account. They are also more tax-efficient, as the gains are taxed as capital gains rather than interest income.

Short-Term Fixed Deposits:
These can be an option for your contingency fund. While the interest is taxable, the safety and predictability of returns make short-term FDs a reliable choice for emergencies.

7. Planning for Health-Related Expenses
Healthcare costs tend to rise with age, and it's essential to be prepared for this eventuality.

Health Insurance:
Ensure you have adequate health insurance coverage. A comprehensive health plan will protect your retirement corpus from being depleted by medical expenses. Consider plans with coverage for critical illnesses and a higher sum assured, given the increasing cost of healthcare.

Senior Citizen Health Insurance:
These plans cater specifically to the needs of senior citizens. They may have higher premiums but offer benefits like coverage for pre-existing conditions after a waiting period, and higher sum insured options.

8. Final Insights
Your retirement years should be stress-free and financially secure. By making tax-efficient investments and carefully planning your income streams, you can enjoy your retirement without financial worries. It's essential to stay invested in a diversified portfolio that balances risk and return, ensuring your wealth grows while providing a steady income.

Avoid the pitfalls of high-tax investments like annuities and focus on options that offer better tax efficiency and liquidity. Additionally, while index funds and direct funds may seem appealing, the benefits of actively managed funds through a Certified Financial Planner far outweigh the lower costs associated with these options.

Finally, regular reviews of your financial plan are crucial. As your needs change over time, your investment strategy should evolve to meet these changes, ensuring that your retirement corpus remains robust and capable of supporting your lifestyle.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |8204 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jan 22, 2025

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sir my monthly income is approx 50000 expense around 35000 can invest 10000 per month my age is 39 F can invest till 10 years for minimum dont have any specific goals just want to have a decent amount at the time of retirement no loan or liability as of now kindly advise with specific MF /Shares /LIC where to invest
Ans: At 39, you have no loans or liabilities.

Monthly income is Rs. 50,000, with Rs. 10,000 available for investment.

You aim to build a retirement corpus over 10 years.

Recommended Savings and Investments
Equity Mutual Funds
Allocate 60% of your Rs. 10,000 to equity mutual funds.

Equity mutual funds provide long-term growth and inflation-beating returns.

Invest through SIPs for disciplined and consistent investments.

Actively managed funds offer higher returns than index funds over the long term.

Hybrid Mutual Funds
Allocate 20% of your investment to hybrid mutual funds.

These funds offer a mix of equity and debt for moderate growth.

They reduce the risk of market volatility.

Debt Mutual Funds
Allocate 10% to debt mutual funds for stability and short-term needs.

Debt funds are safer than equity and provide consistent returns.

Use these for medium-term goals or emergencies.

Public Provident Fund (PPF)
Invest 10% of your monthly amount in PPF.

PPF offers tax-free returns and secure long-term growth.

It is an excellent addition to equity and debt investments.

Importance of Regular Reviews
Review your portfolio every year to track performance.

Adjust investments based on market conditions and life changes.

Rebalance to maintain the right mix of equity and debt.

Build an Emergency Fund
Save 3-6 months of expenses in a liquid fund or savings account.

This protects you from financial stress during emergencies.

Health and Life Insurance
Ensure adequate health insurance for yourself.

Get a term life insurance policy if you have dependents.

Avoid Common Pitfalls
Do not invest in real estate for retirement planning.

Avoid index funds and ETFs due to their lack of active management.

Stay away from ULIPs or investment-cum-insurance products.

Tax Planning for Investments
Use tax-saving instruments under Section 80C, like PPF or ELSS.

Track the new tax rules for mutual fund capital gains.

Consult a Certified Financial Planner for personalised tax advice.

Finally
Start a SIP of Rs. 10,000 across equity, hybrid, and debt mutual funds.

Add PPF for tax-free and stable returns.

Review your plan yearly and increase SIPs as income grows.

Focus on disciplined savings and diversification for a secure retirement.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

Latest Questions
Janak

Janak Patel  |26 Answers  |Ask -

MF, PF Expert - Answered on Apr 09, 2025

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One fincart advisor contacted me for giving me advise regarding mutual funds and investment of sector is fincart a good company or not to invest
Ans: Hi Sammer,

An adviser/company to be categories as good or not is a bit subjective. I say this because you may find people who have had a good experience with them and those who did not have a good one.

But let me try to help you with some pointers that can help you decide
1. Before asking what they can offer you, ask them - "What do you gain by becoming my advisor?" Their response will give you insight into their objectives. If its not clearly stated, then consider it a RED flag.
2. Are they going to advise based on your preferences or they have a selected list that you need to choose from. I have heard of adviser pushing different products without considering your preferences e.g. You prefer MF and they push ULIP, Regular MF vs Direct MF etc. This can include cross selling other products that they are servicing like insurance and pension products.
3. Inquire about their process of engagement before advising you. Will they consider your requirements and evaluate them and present options to choose or start by putting the options on table and recommending MFs without understanding your goals/requirements. Simple ask, so which is the best MF scheme to invest today. If they start listing them - RED flag.
4. How will they construct a portfolio for you, structure and number of schemes in it, will it have a strategy and objective to it. Or will they keep building it over time by adding new schemes as and when. A person once came to me with a portfolio of approx. 30 lakhs with over 30 MF schemes in it - RED flag. Going beyond 5-6 schemes needs to be reviewed thoroughly.
5. What are their processes for reviewing the performance of the portfolio/schemes and how do they provide recommendation for changes in the portfolio. Will they take into account tax impacts when recommending exits.
6. Will they aim to educate you in this whole process about various aspects so as to establish and enhance their engagement, trust and your own confidence in them.
7. Most important - Will it be a fee based engagement or a commission based. Typically fee based engagements should encourage customer's preferences e.g Direct MF, using client's Demat account etc and provide recommendations for customers requirement with alternatives and options. Even when you change a recommendation, they should educate you on its impact and recommend alternative to mitigate the impact. Commission based engagements are based on their earnings from your investment. Some times their approach is to add schemes based on commissions. But there are good advisors who will stay the course of a well constructed portfolio even in this model, having the customers interest at heart.

So do your own assessment of any advisor you engage with based on the above. You can add more points of evaluation based on your own experience and knowledge.
Remember Simple strategies are more often successful.

Thanks & Regards
Janak Patel
Certified Financial Planner.

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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