Best fixed income options for retirees seeking tax efficiency

Life begins after 60. Responsibilities are mostly taken care of. The children are all settled. The daily grind of work comes to an end. It’s finally time to put up your boots and relax. But that doesn’t apply to your money. You need to make sure that your investments keep working hard so you don’t need to anymore. Here are a few principles to keep in mind when planning your post-retirement investments.

1. Certainty should be prioritized over growth

When you are young and at the early stages of your career, you can take more risks since you have a longer outlook and fewer dependents and expenses. As you grow older, risk taking ability reduces since you have more dependents and higher expenses.

By the time you retire you should have invested most of your money into fixed income products which provide stable secure returns, including FDs, Bonds, Debt Mutual Funds, and Government savings schemes like PPF and SCSS. There will be times when other investment classes outperform, but retirees should evaluate their risk taking appetite before allocating money to them.

2. Prioritize safety over returns

Within the fixed income space itself, investors will see a wide range of returns. While certain products give higher returns, investors should evaluate the risk that they come with. Similarly certain products give low returns, and investors should explore whether they can get higher returns at the same risk level.

For example, many investors park their money in FDs which give 7-8% returns. Some investors chase higher returns of ~9% by buying FDs of relatively risker cooperative banks, or of well-known corporates (typically NBFCs). Instead of putting their money in FDs, they should explore the bond market. Corporate Bonds that are guaranteed by state governments are available at 9%. Investment grade Corporate Bonds are available at over 10% returns (in some cases upto 15%). Some of these are the same NBFCs that give FDs at 9%. Thus for the same risk investors can get much higher returns by directly investing in bonds.

3. Explore tax saving opportunities, but check for liquidity

A penny saved is a penny earned. It’s important to be tax efficient but check if there are other constraints. Earlier debt mutual funds used to give indexation benefits on long-term gains but that was revoked in 2023. Thus they are no longer tax efficient. To save taxes, investors can explore deep discount bonds, where the current price is lower than the face value of the bond. When the bond matures, the gain will be treated as LTCG (if held for over a year) which gets taxed at 12.5%, unlike interest income which gets taxed at slab rates. Alternatively, investors can explore tax-free bonds which yield 5.5-6%, effectively translating to 9% pre-tax returns for investors in the highest tax bracket. These are also AAA bonds and thus have the lowest risk. Tax-free bonds are ideal for investors in the highest tax bracket. Investors can also explore government savings schemes. Senior Citizens Savings Scheme gives a return of 8.2% as of now, along with tax benefits of deduction under Section 80C (under old tax regime) up to 1.5 lakhs. SCSS is a 5 year scheme and investors incur a penalty of 1.5% for any early withdrawal. Public Provident Scheme is another option giving a tax-free return of 7.1% but with a lock-in of 15 years. Considering the illiquidity, retirees should avoid this scheme and instead opt for liquid avenues like bonds which can be easily sold on the exchange with money received in 2 days.

4. Move money from illiquid assets to liquid assets

Several retirees invest in property as a way to earn regular rental income, which is expected to grow as the property appreciates. Assuming a rental yield of 2% on residential properties, and property value appreciating by 5%, an investor should expect at least 7% returns on the investment.

However, property prices have not been growing at 5% in the last few years (except in certain pockets or projects), and moreover there is added cost of maintenance and brokerage. Investors should consider selling their properties and shifting their money to liquid assets, even FDs since they give over 7% returns. There could be capital gains on the sale of property, but investors can pay zero tax, if the long term gains are up to 50 lakhs, by buying Section 54 EC bonds. These bonds are again rated AAA and thus have highest safety, but come with a lockin period of 5 years and give 5.25% returns. Post their maturity the investor can invest in other asset classes and enjoy higher returns.

5. Keep a nest egg for emergencies

Do not invest all your money to chase high returns or optimize for tax efficiency. Life is unpredictable, and investors should always keep a nest egg for emergencies. This generally applies to all investors, but is a must for retirees.

Keep a part of your portfolio in ultra-liquid assets (savings account, cash) that can be immediately accessed. Also ensure that you have added nominees for all your investments to enable easy transfer of your legacy to the next generation. Lastly, do not invest all your money for returns. Invest in yourself by spending money to take care of yourself and your loved ones. Since all your major responsibilities and life goals are already done, don’t forget to enjoy life to the fullest!

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)