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How will you increase your post-tax returns ?
Published On , 27 Jun 2017 By Times Of India
It’s been more than two years that the rate of interest in the economy has been on a slide. The industry has cheered falling rate of interest as the economy was struggling. However, at the same time, a large number of people, mainly the retirees who depended on interest income from their savings for their regular expenses, are not happy. Many of them are struggling with the lower income stream they receive. Worse, some are even dipping into their savings to tide over the shortfall.
Many wonder if there is a better solution which could give them higher regular returns, and at the same time do not expose them to high risk and volatility. According to Dhiraj Mittal of Delhi-based Ace Wealth Managers, investing in Debt funds and withdrawing part of the total corpus regularly could be a better solution than putting one’s life’s savings in bank FDs and depending on the interest income from meeting daily expenses.
The preferred route should be the systematic withdrawal plan from a Debt fund. “SWP is the most tax efficient mode for planning withdrawals due to its categorisation as an ‘Asset’. Due this only the income portion of the withdrawal is taxed. On the other hand, pension and interest on FDs gets included in annual income, to be taxed at marginal rate,” said Mittal.
So how does this work? The table below shows the calculations how one could reduce the tax burden while being invested in a relatively safe and low-volatile investment product which gives returns more than what bank FDs can offer.
Here the effective tax burden is Rs 183.11. In comparison, if one had kept the money in a bank FD and took out the Rs 8,000 interest income after a year, the tax burden for the same person would be Rs 2,472.
In addition, those investors who do are planning to pass on the principal amount of their savings to their heirs, could also look at putting a part of their corpus in balanced funds. With at least 65% of the corpus invested in Equity, these funds enjoy better tax efficiency and could be a source of income.
Are there any caveats here? According to Mittal, people who pay income tax at 10% rate and those who are not paying any tax, they can’t benefit from this strategy. “People who are on the 20% and 30% tax brackets can gain from this (Debt fund) strategy,” he said.
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