As a senior citizen, it is crucial that you are financially secure and stable. Along with a stable source of income, one should also have a good tax-saving strategy. Thankfully, there are multiple ways for how senior citizens can save tax via the various deductions and exemptions listed in the Income Tax Act, 19611. A beneficial aspect to know is that some of the tax benefits are slightly amplified if the taxpayer is a senior citizen, i.e., someone aged 60 years or above.
Moreover, senior citizens should know how they can save tax as they might be earning income through their retirement corpus. With no tax-saving strategy in place, there is a chance that a big chunk of this income may be eroded in taxes.
Tax Saving Tips for Senior Citizens
Before we check the tax-saving investment options that senior citizens can avail, let’s take a look at some helpful tips to get a head-start.
1. Select the right tax regime
Presently, there are two tax regimes2, referred to as the old tax regime and the new tax regime (introduced in Budget 2020). Both tax regimes have their own benefits and drawbacks. While the old tax regime has higher tax slab rates, it allows for multiple deductions and exemptions. The new tax regime, on the other hand, offers lower tax rates but one has to forfeit several tax deductions and exemptions. Senior citizens with an aim of saving tax can select from either of them depending on their preferences.
Also, note that the tax slab rates are similar for all age groups (including senior citizens and super senior citizens) in the new tax regime.
2. Opt for insurance-related tax-saving options
There are numerous life insurance tax benefits one can avail when one opts for certain life insurance plans. Deductions are available under Section 80C and Section 80D of of Income Tax Act for life insurance premium paid or health rider. For instance, opting for a critical illness rider with your life insurance policy allows you to claim a tax deduction of up to Rs 25,000. For senior citizens, the deduction limit is Rs 50,0003. As mentioned before, only those who have opted for the old tax regime can benefit from this deduction3 Other insurance products, such as market-linked life insurance, and their tax-saving features, shall be explained later in the article.
Opting for such an avenue may be beneficial is that you get to enjoy the financial security that comes with an insurance policy as well as the assurance that your tax liability can be reduced.
Tax-Saving Investment Options for Senior Citizens
When choosing investment avenues with an aim to save tax, you must also remember to ensure that those avenues are beneficial in other aspects. Other goals, such as capital accumulation, risk moderation (which can be vital for senior citizens), and so on, should be considered as well. With that in mind, here is a list of investment options that a senior citizen should consider for saving tax.
• ULIP (Unit-Linked Insurance Plan)
A ULIP is a type of insurance plan that provides the dual benefit of life insurance coverage and investment opportunity. With a ULIP, you insure your life against several risks and dangers, and your loved ones receive a sum assured amount if anything unfortunate were to happen to you. Alongside, your invested amount also gains returns as per market performance which is related to risk that can be very high or low depending on the type of investment. However, one must research ULIPs thoroughly before investing since there is an element of market-linked risk attached to ULIPs.
Additionally, one can also enjoy ULIP tax benefits. Since ULIPs come under the life insurance category, the premiums you pay for the plan are eligible for a tax deduction as per Section 80C of the Income Tax Act, 1961 under the old tax regime5. The maximum amount you can claim is Rs 1.5 lakhs. The maturity amount is also tax-exempted subject to the provisions mentioned in the relevant section of the Act5.
• Annuity plans
Annuities are a type of insurance product that provide substantial life insurance tax benefits. Annuities work out in two phases - accumulation and vesting. In the first phase, the policyholder makes payments to the insurer. In the second phase, i.e., vesting, the accumulated corpus is paid out in regular instalments to the insured.
So, if you are looking for tax-saving options for senior citizens that offer regular income, then an annuity plan can be one of the choices. The payments made during the accumulation phase are eligible for tax deductions under Section 80C of the Income Tax Act, 1961, subject to the provisions mentioned therein and if the tax is being paid under the old tax regime.
As for the taxation on the accumulated corpus, as per prevalent laws, one-third of the corpus can be withdrawn without any taxation under Section 10 (10A) of the Income Tax Act, 1961. The balance amount may be considered as income and taxed accordingly.
Life insurance – A figurative investment
Buying a life insurance policy is not an investment in the literal sense, but rather in the figurative sense. With a life insurance policy, you might have the assurance of life insurance coverage to secure the future of your loved ones when you are no longer around. What’s more, the premiums paid for a life insurance plan can be used to claim deductions of up to Rs 1.5 lakhs as per Section 80C of the Income Tax Act, 19614.
1. Are life insurance tax benefits applicable for all senior citizens investing in the relevant products?
The tax benefits you are eligible for depend on whether you meet the terms and conditions mentioned in the Section 10(10D) of the Act. Plus, one must also keep in mind the amendments made to this Section before making any final decisions in regard to tax saving for senior citizens.
2. What kind of options are available within a ULIP?
A ULIP policyholder can choose to invest in equity if their risk appetite is high. ULIPs also offer alternatives in the form of debt options to those who have a low-to-moderate risk appetite. One can also opt for a combination of both.