Rama Krishna Vadlamudi, BOMBAY January 3rd, 2010

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There used to be a time when Senior Citizens would get a lot of support and care in a
joint family set up. Now that India has become a dominating part of the so-called global
village, there has been a definitive shift toward the concept of nuclear family, where the
onus is on ‘me and my close family.’ However, the implications of this tectonic shift have
not been fully felt in the Indian community so far, especially, among senior citizens. They
are yet to accept the reality, which is a bit harsh for traditional people to digest in many
an instance. In the light of this new/modern trend, there has been no corresponding
change in the economic well-being or protection of senior citizens.

In view of the shift away from joint family concept to a nuclear family, youngsters in their
40s, 30s and even 20s and who have been earning good income need to set plan for
their retirement in early part of their career, profession or business. This calls for a
radical shift in their saving and investment habits. Now, let us examine the traditional
retirement plans with guaranteed returns and tax saving embedded into them. (Another
article is being written afresh analyzing the retirement plans available from insurance
companies and mutual funds, which do not offer any guaranteed returns. You need to
wait for a few more days to publish it on my SCRIBD pages at www.scribd.com/vrk100)

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General Guidelines for Senior Citizens

Before we go deep into the minute details of the individual plans, let us know a bit about
some basic principles behind retirement plans and the underlying idea behind them.

Start Early: It would be better to start planning for retirement well before the age of
retirement. Starting early enables people to add a variety of schemes and avenues to
their retirement plans. Keeping this in view, many life insurance companies are offering a
variety of products to youngsters in their 30s and 40s with high monthly earnings.

Capital Protection: Protection of capital should be the paramount requirement for

Senior Citizens. People in their golden years prefer safety and stability. As such, they try
to put their money in government securities, post office savings, bank deposits and other
low-risk instruments. So that, return of their hard-earned money is guaranteed at all
times. Social and income security are the two most vital needs for senior citizens.

Diversification of investments: It would be better to spread their investments in

different instruments depending on individual requirements. A variety of safe instruments
for senior citizens are available.

Surety of regular/monthly income: Retirement plans should offer guaranteed and

regular returns for investors so that they can have a stable, peaceful and enjoyable
lifestyle even after retirement.

Liquidity: In retirement, liquidity of saving instruments is of utmost importance. Any

savings product/instrument should be easily encashable so that investors can withdraw
their money in case of financial emergencies arising out of unforeseen events, like, a
medical treatment, etc.

INVESTMENTS SENIOR CITIZENS SHOULD AVOID:

The foremost need for Senior Citizens is protection of capital and guaranteed & regular
income to take care of their daily needs. As such, it would be better if they avoid
investing in equities and equity-linked investments (if one is extremely rich, he/she can
dabble in equity investments, though). They should also avoid any investments that
claim to offer ‘higher’ or ‘superior’ returns. In our country, there are a lot of sellers of
financial products in the garb of ‘financial advisors.’ Such sellers are similar to ‘quack’
doctors who are available at every nook and corner of India. Seniors need to be wary of
such sellers of financial products, which are sold to innocent people without explaining or
analyzing the merits/demerits/suitability of such financial products to the specific needs
of individuals.

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 Rama Krishna Vadlamudi, BOMBAY January 1, 2010
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Let us now discuss some schemes that offer low-risk and high-security features:

1. Senior Citizens Savings Scheme (SCSS) - 2004

FEATURES:

Eligibility: Senior citizens who are above 60 years of age are eligible for depositing in
this scheme. Individuals who are more 55 years and have retired after voluntary
retirement scheme are also eligible. Retired personnel of Defence Services are also
eligible to invest irrespective of the age limits subject to certain conditions.
Amount: The minimum deposit is Rs 1,000 and the maximum amount is Rs 15 lakhs, in
multiples of Rs 1,000.
Period: For five years, this can be extended by another three more years
Rate of Interest: Nine per cent per annum

Interest payment: Interest is paid quarterly on 30th June, 30th September, 31st
December and 31st March.
Premature withdrawal: Investors can prematurely withdrawal the deposit. As such,
the scheme provides high liquidity to investors. However, investors will have to bear a
penalty depending on the period. For withdrawals after one year but before expiry of two
years, penalty of 1.5 per cent of initial deposit will be levied. For withdrawals after two
years, penalty of one per cent of initial deposit will be charged.
Tax benefits: This scheme is eligible for Section 80C (of Income Tax Act) benefit.
Investments up to Rs one lakh in Senior Citizens Savings Scheme (As per Section 80C,
a taxpayer is allowed a maximum deduction of Rs one lakh from his annual income for
certain savings instruments, which include Senior Citizens Savings Scheme, National
Savings Certificates, Insurance policies, Public Provident Fund and others)
Tax Deduction at Source (TDS): The interest income received under the scheme is fully taxable and is
subject to TDS. However, TDS can be avoided by submitting Form 15-H (for Senior Citizens of age 65 years
or more-Income Tax Act defines a senior citizen as a person of 65 years or more) or Form 15-G (for persons
below the age of 65 years) as the case may be to post office/bank. This form may be given at the time of
deposit itself. This is going to change with effect from April 1, 2010. From that date, all term deposit holders
shall compulsorily quote their PAN (permanent account number); otherwise, TDS at much higher rate of 20
per cent or more will be deducted from interest payable irrespective of the interest amount due by
banks/Financial institutions/NBFCs or companies.

Where to Deposit: Post Offices, 24 public sector banks and ICICI Bank. (Only designated branches of
these banks are allowed to open these accounts)

Nomination: The facility is available

Joint Account: Single or joint accounts are allowed. Joint account can be held only with the spouse.

Non-eligibility: Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not eligible to invest
in the scheme

Transfer: In case of change of residence, the depositor can transfer his account to another post office/bank

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 Rama Krishna Vadlamudi, BOMBAY January 1, 2010
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2. Post Office Monthly Income Scheme (POMIS)

FEATURES:

Eligibility: POMIS is available at post offices and only individuals are eligible to invest
in the scheme

Amount: The minimum deposit is Rs 1,500 and the maximum amount is Rs 4.5 lakhs
and Rs 9.00 lakh for single and joint accountholders

Period: For six years

Rate of Interest: Eight per cent per annum

Interest payment: Interest is paid monthly. Interest is credited directly every month to
Savings Bank account maintained with the post office where the deposit is made.
Interest received under the scheme is fully taxable in the hands of the depositor.

Bonus: Investments, made after December 8, 2007, will be eligible for a bonus of five
per cent on the amount invested. The bonus will be paid upon maturity of the deposit

Premature withdrawal: Depositors can prematurely withdraw the deposit. As such,

the scheme provides high liquidity to investors. However, investors will have to bear a
penalty depending on the period. For withdrawals after one year but before expiry of
three years, penalty of 2.0 per cent of initial deposit will be levied. For withdrawals after
three years, penalty of 1 per cent of initial deposit will be charged.

Tax benefits: There are no tax benefits for deposits made under POMIS

Nomination: The facility is available

Joint Account: Single or joint accounts are allowed.

3. Five-Year Post Office Time Deposit (5-year POTD)

FEATURES:

Eligibility: Individuals are allowed to invest in the scheme. Single or Joint accounts are
allowed.

Amount: The minimum deposit is Rs 200. And there is no upper limit.

Period: For five years

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Rate of interest: 7.5 per cent for five-year Post Office Time Deposit

Interest Payment: Interest is payable on the basis of quarterly compounding, but

interest is paid to the investor only annually. Interest received under the scheme is fully
taxable in the hands of the depositor.
Premature Withdrawal: Up to six months from the date of investment, no premature
withdrawal is allowed. If money is withdrawn between six months and less than one year
from the date of investment, no interest will be paid on the deposit. If withdrawn after one
year, interest will be paid at a rate 2% less than the rate applicable for the period for
which the deposit has run
Tax Benefits: The five-year Post Office Time Deposit is eligible for tax benefits under
Section 80C with an upper limit of up to Rs 1,00,000. (In addition to 5-year POTD, post
offices offer 1-year, 2-year and 3-year time deposits with lesser interest rate compared
to 5-year deposit. However, 1-year, 2-year and 3-year time deposits will not be eligible
for Section 80C income tax benefits)
Nomination: The facility is available

4. Five-Year Bank Deposits (Tax Saver Schemes)

Several banks are offering Bank deposits with payment of monthly options. Banks also
offer special fixed deposits of tenure of five years or more with tax benefits under
Section 80C of the Income Tax Act. Banks offer interest rates ranging from 8% to 10%
on these special fixed deposits. The full details will be available with the banks.

ALTERNATIVE IDEA

If one is prepared to take a little risk, one can think of pursuing an alternative idea.

The idea consists of two parts:

First part: Senior citizens can invest, say, Rs 3,00,000 in POMIS (Post Office Monthly
Income Scheme-discussed above) and give a mandate to the post office to credit the
monthly interest to their Savings Bank account with the particular post office. If they do
not have an SB account with the post office, they can open a new SB account with the
post office.

Second part: The initial investment of Rs 3,00,000 attracts an interest of Rs 1,950

(approx.) per month and it will be credited to the depositor’s SB account with the post
office. This interest amount of Rs 1,950 can be invested every month regularly in a
diversified equity mutual fund with a good and long-term track record. Otherwise,
depositor can give an ECS-Debit instruction to a mutual fund so that the interest amount
is debited from the savings bank account every month and re-invested in a particular
scheme-chosen by the investor-by the mutual fund. (ECS-electronic clearing service-is
provided in metros and tier-II cities)

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 Rama Krishna Vadlamudi, BOMBAY January 1, 2010
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RATIONALE: By investing in post office, one gets full protection of the capital as post
office deposits are guaranteed by the Government of India. After protecting one’s capital,
one can take a little risk and invest the monthly interest income into a well diversified
equity mutual fund with a good and long-term track record. By investing in a well
diversified equity mutual fund, one can be hopeful of getting 12 to 15 per cent over long
periods of five or ten years. Here, the risk is limited to the extent of interest income while
the capital is fully protected. After five or ten years, the senior citizen can pass on the
mutual fund units to their heirs without attracting any capital gains tax. By bequeathing
the mutual fund units to the inheritors, one gets the satisfaction of passing on good
assets to their children/heirs.

Note: Please note to consult your Financial Advisor/Planner for full details before
investment for latest modifications and suitability of the respective products to
individual needs. For sophisticated investors, a plethora of schemes, like, liquid
mutual funds, 8% RBI bonds (taxable) fixed maturity plans, company fixed
deposits, structured products, monthly income plans from mutual funds, etc., are
available. These details can be sourced from websites, books or investment
advisors.

IMPORTANT NOTE:

GOLDEN YEARS: Retirement is more about how one spends his/her time in a more
meaningful manner, rather than about savings or money. Retirement is more about
psychological issues than financial issues. Money is also important, but retirees need to
give more value to a life that is joyous, delightful and meaningful in their own way. In
golden years, one gets plenty of time to pursue their special, passionate and well-
established interests, which they could not fulfill during their working life. While some
prefer to spend their time with little children, some remain active by providing a helping
hand to the less privileged through teaching or training youngsters. Some would prefer
to concentrate on voluntary or community-based activities. Many try to learn new
languages and games and make new friends.

Our life expectancy has gone up of late, which means our non-earning retirement
phase has increased from about 10 years to 20/25 years. So, nowadays, retirees are
more in need of money after retirement. As such, many seniors, who are healthy and
enjoy their work, opt to undertake part-time jobs, even after retirement, with a view to
remaining active and supplementing their pensions. It would be better if people plan for
their retirement well before so that they can take care of all their financial needs in a
smooth manner. Developing non-work related interests early on one’s life is vital to
prepare oneself for the retirement. As the concept of nuclear family has been on the rise,
senior citizens need to brace themselves for facing a few harsh realities in post-
retirement life.

TAILPIECE:

Question: “What is old age?”

Answer: “When we have ceased to wonder.”

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 Rama Krishna Vadlamudi, BOMBAY January 1, 2010
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Annexure A: Personal Income Tax Slabs for FY 2009-10

For Women below age of 65 years # For resident individuals, HUFs, etc #
Total Annual Income Rate of Total Annual Income Rate of Income
(Rs.) Income Tax (Rs.) Tax
Up to 1,90,000 NIL Up to 1,60,000 NIL
1,90,001 to 3,00,000 10% 1,60,001 to 3,00,000 10%
3,00,001 to 5,00,000 20% 3,00,001 to 5,00,000 20%
5,00,001 and above 30% 5,00,001 and above 30%
# For senior citizens of 65 years and above, the exemption limit is Rs 2.40 lakh
Cess for Education: At three per cent on income tax payable

Deductions allowed under Section 80 C (Aggregate amount of deduction

under this section shall not exceed Rs one lakh) (Read with section 80CCE)
In 2005-06, section 80C replaced old section 88. Under section 80 C, individuals
and HUFs are allowed deductions of up to a maximum Rs. 1,00,000/- from taxable
income for payments and contributions as given below; without any sectoral caps.
1 Life Insurance premia. Annual premium of any policy shall not be more than 20
per cent of the sum assured.
2 Contribution to a recognised provident fund
3 Voluntary contribution by employee to a recognised provident fund
4 Contribution to Public Provident Fund account (PPF scheme allows interest on
annual contributions of up to Rs 70,000 only)
5 Contribution by an employee to an approved superannuation fund
6 Contribution to National Savings Certificate (NSC) VIII issue
7 Interest accrued on NSC VIII issue during the current year except interest for
the sixth year
8 Contribution to Unit Linked Insurance Plans
9 Contribution to annuity plan of a life insurance company
10 Equity Linked Savings Scheme (ELSS) of a mutual fund
11 Contribution to pension schemes of two mutual funds, namely Templeton India
Pension Plan and UTI Retirement Benefit Pension Fund
12 Tuition fee paid to a college, school, etc, for education of any two children of an
assessee. However, the eligible amount shall not include any payment towards
any development fees or donation.
13 Instalments paid in a year towards Housing Loans
14 Bank fixed deposits for a period of not less than five years (wef April 1, 2006)
15 Deposits in a Senior Citizens Savings Scheme (SCSS)
(wef April 1, 2007)
16 Sums deposited in a Five-year time deposit scheme of a Post Office
(wef April 1, 2007)

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SECTION 80CCC (Aggregate amount of deduction under this section shall not
exceed Rs one lakh) (Read with Section 80CCE)

Section 80CCC allows for a deduction from income of an amount of Rs one lakh
deposited by an individual towards any annuity plan of the Life Insurance
Corporation or any other insurer for receiving pension.
(Prior to April 1, 2006, only Rs 10,000 was allowed).

SECTION 80CCD (Aggregate amount of deduction under this section shall not
exceed Rs one lakh) (Read with Section 80CCE)

Section 80CCD allows for a deduction in respect of contribution to New Pension

System as notified by the Central Government. Individuals, including public/private
sector employees and self-employed individuals, can avail this tax benefit. In
respect of employees, the deduction shall not exceed 10 per cent of their salary.
For employees, this section is applicable from January 1, 2004 and for self-
employed individuals from April 1, 2008 (FY 2008-09).

SECTION 80CCE (VERY IMPORTANT – INTRODUCED IN 2005-06)

Section 80CCE states that the aggregate amount of deductions under section 80C,
section 80CCC and section 80CCD shall not, in any case, exceed Rs one lakh

DEDUCTIONS THAT ARE ALLOWED IN ADDITION TO DEDUCTIONS

UNDER SECTIONS 80C, 80CCC & 80CCD
SEC. DETAILS OF THE SECTION DEDUC-
TION Rs
80D Health insurance premium of the individual or family 15,000
In addition to above, health insurance cost of parents* 15,000
* If parents are senior citizens (65 years & above) (the parents need not 20,000
be dependant on the assessee)
80DD Expenditure incurred for medical treatment of a disabled dependant 50,000
(ordinary disability) #
For severe disability # 1,00,000
# pertains to deduction for maintenance (including medical treatment), training
and rehabilitation of a handicapped dependant; or on the amount paid or
deposited under a scheme of the Life Insurance Corporation of India or other
insurance for maintenance of disabled dependant
80DDB Medical treatment of herself or a dependant 40,000
If the assessee is a senior citizen 60,000
80E Individuals can claim deduction for interest paid on loan taken for Actual
amount
pursuing full-time education of her/his own or her/his relative (Note:
paid
Deduction can be claimed for eight years and education includes all fields of
studies post-schooling)

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80G Donations paid to Prime Minister's National Relief Fund or such other 100% of
approved funds donation
Donations paid to other funds/institutions 50% of
donation
80U Deduction allowed to inviduals with permanent physical disability 50,000
(including blindness)
In case of severe diability 75,000

For my full article on Income Tax Slabs 2009-10

for Resident Indians, HUFs: just click:
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