Most senior citizens choose fixed deposits or other interest bearing investments like Senior Citizen Scheme to hold their retirement corpus. Most of us with older parents, know this intimately and help our parents manage their multiple fixed deposits.
The benefits are clear for them: Banks and post offices are safe; return is guaranteed. The only negative is that this income is completely taxable and TDS is deducted every year even though they will receive the interest income in their hands only on the maturity of the deposit - this affects compounding.
But this is not a problem if their income is below taxable limit. They can submit a declaration in form 15H (see note below) and TDS will not be deducted. This is why, for senior citizens without taxable income, we consider fixed deposits a good option.
Unfortunately, as people get older, this Form 15H submission itself can become a problem. It has to be submitted every year for each account separately and I have seen my own father fill up 20 forms and then make his annual pilgrimage to the various banks in April. He then follows up to ensure that the declaration has been recorded in the banks' systems so that TDS is not deducted.
Is it possible for senior citizens to avoid TDS and thus avoid filling form 15H?The answer is yes and it's quite easy to do so. Just move money from FDs to Debt Funds. For pretty much the same or more return on your money, senior citizens such as your parents can get the added benefit of no TDS and therefore no need to submit Form 15H.
But don't they have to pay capital gains tax?
Scenario # 1: Your parents depend on the income from the deposits for regular expenses.
They can withdraw money as per their needs. Only the return portion of the withdrawal amount will attract income tax.
So let's say they withdraw Rs 30,000 per month, then approx only Rs 30,000 of the Rs 3,60,000 withdrawn will be the income portion. As this will be far below taxable limit, no tax will be payable.
(In comparison, if they earn Rs 360,000 as interest, all of it is counted as income)
Scenario # 2: Regular income is not required
The amount can grow in debt funds and after 3 years, due to indexation, the effective rate of tax is negligible.
But what about risk? A lot of people distrust debt funds because of the perceived risk associated with mutual funds. However, unlike equity mutual funds, debt funds are not exposed to stock market movements. The risk, therefore, of losing your hard earned money is much lesser than you would think. In fact, both FDs and debt funds face the same interest rate movement risks but in the case of FDs the movement is invisible and you don't realize what happened to your money. More on this here.
So what do you do? Speak to your parents who are senior citizens and suggest moving at least some of their corpus to Debt Funds. Investing the amount in a range of moderate risk short term and ultra-short term debt funds can not only help them avoid submitting Form 15H but also help them reduce their overall tax liability. TIP: If your parents are not comfortable with debt funds, don't force it. Instead, help by taking over the task of submitting the forms for them.
FACTOID: What is Form 15 H?The government taxes interest earned on your FDs through something called tax deductible at source or TDS. The tax is only charged if the total interest earned on that Fixed Deposit crosses Rs. 10,000 in a year.Form 15 H is required to prevent your FD interest from being taxed. If you don't want to pay TDS, then you must submit form 15 H provided your overall tax on your income is zero. One more thing, Form 15 H is needed for those older than 60. Most of our parents, thus, fall in this category.Conditions to submit 15 H- Individual- Resident Indian- 60 years old- Tax calculated on your total income is nil