Senior citizens in India often look for ways to reduce their tax liability while ensuring a steady income stream during their retirement years. One effective way to achieve this is by investing in tax saving mutual funds. Mutual funds not only offer growth potential but can also help senior citizens save on taxes, especially through schemes like the Equity Linked Savings Scheme (ELSS) and other tax-efficient funds. In 2024, with changes in income tax slabs and available exemptions, senior citizens can optimise their tax planning by incorporating mutual funds into their financial strategy.
In this article, we will discuss how senior citizens can save tax by investing in mutual funds, the best tax saving mutual funds to consider, and how the current income tax slabs impact their tax-saving opportunities.
Tax Saving Mutual Funds (ELSS)
One of the most effective ways to save taxes through mutual funds is by investing in Equity Linked Savings Schemes (ELSS). These funds continue to be the primary choice for senior citizens looking for both tax benefits and long-term capital growth.
Key features of ELSS:
- Section 80C Benefits: Investments in ELSS are eligible for tax deductions under Section 80C of the Income Tax Act, with a maximum deduction of Rs 1.5 lakh per financial year. This reduces the overall taxable income.
- Short Lock-in Period: ELSS funds have a lock-in period of only three years, making them the shortest-term tax-saving option under Section 80C, compared to instruments like Public Provident Fund (PPF) or National Savings Certificates (NSC).
- Capital Gains Taxation: Long-term capital gains (LTCG) from ELSS investments are tax-free up to Rs 1 lakh in a financial year. Gains above this threshold are taxed at 10%, with no benefit of indexation. This updated tax rule continues to make ELSS a tax-efficient option for senior citizens.
Why ELSS is ideal for senior citizens:
For senior citizens with a moderate risk appetite, ELSS funds offer a combination of equity exposure and tax savings. Despite the market risks, ELSS funds provide an opportunity for wealth creation while benefiting from the tax deduction under Section 80C. The LTCG tax of 10% for gains over Rs 1 lakh is still relatively favourable compared to other forms of income taxation.
Systematic Withdrawal Plan (SWP) for regular income
For senior citizens seeking regular income from their investments, a Systematic Withdrawal Plan (SWP) is an effective and tax-efficient option. An SWP allows investors to withdraw a fixed amount at regular intervals, offering a steady income stream while keeping the investment in place.
How SWP works for tax efficiency:
- Capital gains on withdrawal: When withdrawing funds through an SWP, only the capital gains portion is subject to tax, not the entire withdrawal. This can result in a lower tax burden compared to receiving dividends or interest income, which are fully taxable.
- Equity fund taxation: For equity mutual funds, withdrawals made after one year are subject to LTCG tax at 10% if gains exceed Rs 1 lakh in a financial year. Gains below this limit are tax-free.
- Debt fund taxation: With the new tax rules for 2024, debt mutual funds are now taxed similarly to fixed deposits. There is no longer an indexation benefit for debt funds, and gains are taxed according to the income tax slab of the investor, whether they are short-term or long-term gains.
Why SWP is beneficial for senior citizens:
The SWP option provides senior citizens with the flexibility to generate regular income while reducing their tax liability. Since only the gains portion of the withdrawal is taxed, senior citizens can effectively manage their income tax exposure.
Balanced and hybrid mutual funds
Balanced or hybrid mutual funds invest in both equity and debt instruments, offering a balanced approach to risk and return. These funds can be ideal for senior citizens looking for growth and stability in their portfolio.
Taxation of hybrid funds:
- Equity-oriented hybrid funds: If a hybrid fund allocates more than 65% of its portfolio to equities, it is taxed like an equity mutual fund. This means LTCG is tax-free up to Rs 1 lakh, and gains exceeding Rs 1 lakh are taxed at 10%.
- Debt-oriented hybrid funds: If the fund has less than 65% equity exposure, it is taxed like a debt fund. As per the 2024 rules, all gains from debt-oriented funds are taxed according to the income tax slab of the investor. There is no indexation benefit for long-term capital gains from debt mutual funds.
Why balanced funds work for senior citizens:
Balanced funds provide the stability of debt with the growth potential of equity. For senior citizens, this balance helps manage risk while also ensuring some level of capital appreciation. The tax treatment of equity-oriented hybrid funds remains favourable, making them a good option for long-term goals.
Debt Mutual Funds After 2024
The 2024 tax rule changes have significantly affected the attractiveness of debt mutual funds for long-term tax planning. With the removal of the indexation benefit, debt funds are now taxed similarly to fixed deposits. Gains from debt mutual funds, whether short-term or long-term, are taxed at the investor’s income tax slab rate.
Tax treatment of debt funds:
- No indexation benefit: Under the new rules, debt mutual funds no longer offer the indexation benefit for long-term capital gains. This means that gains from debt funds, regardless of how long they are held, are taxed according to the individual’s income tax slab.
- Short-term gains: If debt mutual funds are redeemed within three years, the gains are considered short-term and are taxed at the applicable income tax slab rate.
- Long-term gains: Long-term capital gains from debt mutual funds (after three years) are now taxed at the individual’s income tax slab rate, which reduces the tax efficiency compared to previous years.
Why debt funds still matter for senior citizens:
While the tax benefits of debt mutual funds have diminished, they remain a safer option for senior citizens who prioritize capital preservation over high returns. The stability of debt funds can still be beneficial for risk-averse investors, even though the tax treatment has changed.
Conclusion
The 2024 tax rules have altered the landscape for mutual fund investments, especially for senior citizens. Despite the changes, tax saving mutual funds like ELSS remain one of the most effective ways to reduce tax liabilities while providing growth opportunities. The Systematic Withdrawal Plan (SWP) continues to be a valuable tool for generating regular income in a tax-efficient manner.
While debt mutual funds have become less tax-efficient due to the removal of indexation, they still provide stability and can play a role in a diversified portfolio for senior citizens. By understanding the new tax rules and strategically choosing mutual funds, senior citizens can optimise their investment portfolio to balance both growth and tax savings.
