Stick with investment instruments that can comfortably fulfill requirements even after paying taxes...
19-Apr-2013 •Research Desk
After retiring in September 2012, I invested Rs 92 lakh in bank fixed deposits at 9.75 per cent interest. I fall in 20 per cent income tax bracket. I think my investments are not tax efficient.
I have come across articles suggesting investments in mutual fund debt income schemes and set up SWP for maximum tax efficiency. I have sufficient exposure to equity shares and equity funds.
My expense requirements are Rs 55,000-60,000 per month (housing loan EMI at Rs 27,000 and monthly expenses at Rs 30,000). I can wait for one year for the first systematic withdrawal to reap benefits of the long term capital gains.
Kindly suggest a suitable debt income portfolio providing minimum risk, maximum capital protection and maximum tax efficiency.
- Mayank Sharma
Income funds are undoubtedly more tax-efficient than fixed deposits. Income from fixed deposit is added to your income and taxed according to your tax slab which would be 20 or 30 per cent in your case. While gains from income funds will be taxed at 10 per cent without indexation and 20 per cent with indexation.
Being a retiree your need for regular income is paramount. Also it is important to understand that no funds guarantee returns. Even income funds can be volatile depending on interest rates. Five-year returns from this category stand at 7.5 per cent, way less than what you get now. At 10.5 per cent, the one-year returns from this category are higher than bank FD. But they also tell you about how volatile they can be for a household like yours, which would depend on the fund returns for monthly income and EMI payments.
A bank fixed deposit may be more suitable to you as the monthly post-tax returns from your FD come out to be Rs 59,800 which is sufficient for your needs. And these are guaranteed returns.
Investments in debt-oriented income funds for tax efficiency may not make sense if you don’t meet your monthly requirements. You must understand that no investments in mutual funds are risk free. Even if you invest in well-rated income funds, there is always some risk from choppy markets or unsettling interest rates. You can check the long-term performance of well rated debt-oriented income funds from the fund selector tool on our website, the inconsistency in returns is obvious.
These are your golden years which should not be spent worrying about monthly income. And where inflation and rising expenses are concerned, you already have some equity allocation to make up for it. So a guaranteed fixed income source, that can preserve capital is certainly better for you.
Your current investment has all the qualities you are looking for. If your investments can comfortably fulfill your requirements even after paying all taxes, you have nothing to worry about.