QI is a 73-year-old retiree. In addition to the bank deposit of Rs 10 lakh, I invested Rs 20 lakh in the SCSS scheme in the joint names of myself and my spouse. For some time now, I have also invested in mutual funds, which have grown to a size of Rs 20 lakh and have given annualized returns of around 15%. I have no debt.
Since my pension income is not enough to cover my household expenses, I am considering exiting MF investments and switching to bank fixed deposits, which will give me a return of about 7.5% to supplement my pension income. But exiting the MF will make me liable to LTCG tax as a one-time measure, while the interest on the FD will affect my income tax at a fixed rate of 20%.
Given the above, I can’t decide on the best course of action. Please advise.
Anand Vasantrao Alabati
A: While we understand the tax burden, please accept the fact that there is nothing you can do to avoid it. You can reduce it a little bit. First, talk to your auditor to find out whether the new tax system or the old tax system would be beneficial to you. Can be changed every year. By default, this will be the new tax system.
Second, we don’t know whether you hold equity mutual funds or debt mutual funds. If you hold equity funds (based on your returns, we assume you hold equity), LTCG is taxed at 10% after deducting the gain of Rs 1 lakh. You might consider moving in stages each year.
Therefore, you may consider exiting in stages. Assuming you hold equity funds (based on your returns), transfer a portion of it to SCSS and RBI floating rate savings bonds to generate income.
Only move the parts of the corpus that you think are necessary to generate revenue for you. Let the rest of your mutual funds (especially stock funds) grow.
If you happen to own debt mutual funds, then you can consider Systematic Withdrawal Plan (SWP) as an income source. This way, you’ll generate monthly cash flow for yourself, but the tax won’t be on the full amount, but on the earnings portion of each withdrawal. SWPs are tax efficient compared to interest income, but are best achieved using low volatility options such as debt funds.
Also, if you use SWP, make sure you only withdraw an amount each month that is less than the fund’s average return so you don’t withdraw your money prematurely.
Q: How can I become a personal finance expert? Not professionally, just to manage my personal finances and make wise investments.
A: The best way to learn is to start investing in yourself. You can start investing small amounts in simple and quality products like PPF and bank deposits. Then, you can read to learn more about money and investing. You may consider reading books like “Let’s Talk Money” by Monika Halan and “You can be rich: With Goal Based Investing” (PV Subramanyam and M. Pattabiraman) to understand the basics of money and financial planning.
Start using a calculator that will tell you how much money you need to save (at an assumed rate of return) to reach a specific goal in a specific time period.
You can visit mutual fund websites to learn the basics. Once you understand this, you can try reading about how the stock market works and how to understand a company’s financial and business prospects.
Read business news regularly through business newspapers or business news websites. You can check out our Prime University to learn the basics of personal finance, mutual funds, and stocks.
It’s important not to be swayed by the “easy money” talk you hear around you, especially on social media. Listen to audio or video for market tips, but know that like any other journey, the financial journey takes time. There won’t be any sustainable shortcuts.
(The author is co-founder of Primeinvestor.in)