Retired individuals tend to receive a lump sum on retirement and then need to park money in such away that their tax liabilities is minimal. In fact, these individuals may need to reduce their tax liability in the most efficient manner.
Tax free bonds
Tax free bonds may not offer the best interest rates, like senior citizens saving scheme. However, they come with a tax free income. The interest earned is total exempt from income tax. However, the interest is paid annually and not at regular intervals, like a company fixed deposit. This is one drawback.
Interest could be around 7.5 per cent for tax free bonds, which is not the best around. Go for this investment, only if you are in the highest tax bracket. If your tax liability is nil, please do not invest in this scheme. You are better-off in the Senior Citizens Saving Scheme, which gives an interest rate of 9.3 per cent per annum.
Equity shares of NMDC
Buying shares of NMDC is a great option for retired individuals, as the company declares a dividend of around Rs 8 per share, taking the dividend yield to more than 10 per cent. NMDC declares dividend 2 times a year. Dividends are tax free in the hands of the investor.
The only disadvantage of investing in the NMDC shares is that, there is an element of risk when one buys the shares. However, the company is a cash rich company with a monopoly business.
Dividends from mutual funds
Dividends declared by mutual funds are also tax free and you could look at both equity and debt dedicated funds, that declare regular dividends. However, retired folk have to be careful, because equity mutual funds are risky and when one has retired, equity mutual funds, may not be the best proposition around.
One has to examine carefully, the tax liability and the extent of risk. If you are in the highest tax bracket, go for tax free bonds. If you are in the lowest tax bracket, stick to instruments like the Senior Citizens Saving Scheme or select company deposits, which are very safe. These would include KTDFC, Mahindra Finance or HDFC. You may also look at post office monthly income scheme.
If you are willing to take a risk, look at equity mutual funds that have a good track record and pay regular dividends.