1. Avid Fixed Deposit savers, who are Senior
Citizens (60 & above), have a tax-saving bonanza now because:-
a) Under Sec 80C, up to 1.5 lakh annually can
be saved in 5-10yr Tax Saver FDs.
b) Under Sec 80TTB, 50,000 annual interest, on
Savings, and FDs too, is tax-free.
c) As interest amounts earned on all FDs are
eligible for this deduction, it will also include interest on Tax Saver FDs,
even for paid out option!
2. Hence, a conservative Senior Citizen who
follows "100 minus age rule" and generally has 60-80% of corpus in
debt-oriented products, can now beneficially reconstruct his short-term and
long-term Debt portfolio into Savings accounts, Tax Saver FDs (paid-out and
accrued interest options) and Regular FDs (paid-out interest option is now
better), through the process of "laddering", since a logical analysis
shows softening of interest rates.
3. A ladder of debt products can be compared to an
actual ladder for better understanding, which would, thus, have steps/rungs, a
height and material to make it.
4. Height is difference between shortest and longest maturity in portfolio of specific material, of few months or many years.
5. Steps / rungs are arrived at by dividing total investment by total number of years for which you wish to have the ladder, and is total number of used material with more rungs ensuring it is well diversified.
6. Materials used for ladders are fixed income investments like bonds, govt. securities, debentures, fixed deposits, NSCs, etc.
7. In case one doesn't need money on maturity dates, he can reinvest in new instruments of various maturities and amounts at prevalent interest rates to continue laddering process.
4. Height is difference between shortest and longest maturity in portfolio of specific material, of few months or many years.
5. Steps / rungs are arrived at by dividing total investment by total number of years for which you wish to have the ladder, and is total number of used material with more rungs ensuring it is well diversified.
6. Materials used for ladders are fixed income investments like bonds, govt. securities, debentures, fixed deposits, NSCs, etc.
7. In case one doesn't need money on maturity dates, he can reinvest in new instruments of various maturities and amounts at prevalent interest rates to continue laddering process.
8. A Senior Citizen can protect his capital,
and also save taxes annually, by utilizing the laddered Savings accounts and
FDs, say, as follows:-
a) Maintain 1 lakh annually in 3% Savings
accounts:- 3000 annual interest earned,
b) Avail Sec 80C tax benefits up to 1.5 lakh
annually, by laddering 6% Tax-saver FDs of 5-10 years duration:- 9000 annual
interest earned (whose taxation can be deferred to maturity year too), and
c) Ladder up to 6 lakh in 6% normal FDs of 1-4
years duration:- 38000 annual interest earned.
d) In this way, 7.5 lakhs (excluding 1 lakh
maintained in savings accounts) can be laddered annually without paying any
tax, as 50,000 annual interest earned by senior citizens is tax-exempt u/s
80TTB.
e) Further laddering can also be done if his
total annual income remains non-taxable.
9. Continuous laddering, as per suitability of
future withdrawal needs, helps optimal tax-planning and capital protection of a
senior citizen.
10. For his balance debt corpus, similar
laddering of higher interest debt funds would also be tax-efficient, as there
would be no accumulated interest involved too.
11. Upon subsequent SWP, as per his 3-yr+
needs, LTCG would also qualify for tax benefits under indexation rules.
12. As interest rates keep changing due to
inflation, domestic growth, money supply or global economy,
"laddering" is a fixed income strategy made by spreading corpus
evenly among various debt products that mature at regular time intervals, which
could be as short as 1 month and as long as 10 years, depending on his risk
appetite and goals, offering cash flows as per goals, by maturity of products
at regular intervals.
13. Getting stuck with interest rates is also
avoided, as instruments that offer better interest can be chosen as soon as old
instruments mature, besides managing market volatility by avoiding getting
locked into a product for an extended period, thus diversifying investments and
reducing risks, by starting with shorter duration products, and then expanding
the ladder gradually as needed.
14. These can be any fixed income investments,
such as bank FDs, Post Office products, bonds, government securities,
debentures and debt funds of different maturity.
15. Although Non-senior Citizens can avail of
Sec 80C tax benefit through 5-10 year Tax Saver FDs while investing, interest
is taxable at slab rate (although tax on accrued interest can be deferred till
maturity year), while both types of interest (paid or accrued) are taxable
annually in other normal FDs, because 10,000 interest deduction is applicable
only for Savings accounts under Sec 80TTA.
16. For them, 3+ year debt funds, for medium to
long term portfolio, would be better, both for market-linked earnings and
indexation tax benefits, especially for higher tax slabs.
17. For MF-savvy investors with taxable income,
an EPF-ELSS-Debt Fund-Hybrid Fund-Equity Fund combo is better suited for a
healthy inflation-beating growth-oriented investment portfolio.