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Fixed Income Investment Strategies for Different Life Stages

“Money talks,” but when it comes to fixed-income investments in India, it is not just about how much money you have, it is about how much you can keep. Therefore, understanding the tax implications associated with fixed-income investments is critical for investors looking to maximize their returns and minimize their tax liability.  

If you are considering fixed-income investments, there is no better time to invest in India. The government has recently increased interest rates on various savings plans, making fixed-income investments an even more attractive option.  

According to the latest reports, interest rates for long-term deposits such as 1-year, 2 years, 3 years, and 5 years deposits are expected to increase in the upcoming quarters. For instance, the interest rate for a 1-year deposit is expected to increase from 6.60% to 6.80%, while the interest rates for 2 years and 3 years deposits are expected to rise from 6.80% to 6.90% and from 6.90% to 7.00%, respectively. The interest rate for a 5-year deposit is expected to increase significantly from 7.00% to 7.50%.  

With increasing interest rates, fixed-income investments can provide stable returns. 

Although it is imperative to remember that taxes can impact your returns, it is equally crucial to understand the tax implications of fixed-income investments in India. Additionally, different life stages call for different investment strategies for fixed-income investments. 

Taxation on Fixed-Income Investments

If your total income exceeds the minimum exemption limit, you will have to pay tax on interest earned on your fixed-income investments. The tax rate can range from 0% to 30% based on your income tax slab rate.  

For instance, if you fall under the 30% tax slab and earn interest income of Rs. 5 lahks from your fixed-income investments, you’ll have to pay Rs. 1,50,000 as a tax on interest earned. It’s critical to note that tax is deducted at source (TDS) by the bank or financial institution where you have invested. 

To maximize your returns and minimize your tax liability, it is crucial to choose fixed-income investments that offer tax benefits.  

For example, investing in tax-saving fixed deposits or National Savings Certificates (NSC) can reduce your tax liability. Additionally, it is imperative to choose the right investment tenure and avoid premature withdrawals, which can attract a penalty and impact your returns. 

Taxable and Tax-Exempt Investments

When investing in fixed-income securities, investors need to know the tax implications of their investments. Fixed-income securities can be taxable or tax-exempt. 

Taxable fixed-income securities include fixed deposits, bonds, and debentures, among others. The interest earned on these securities is subject to tax at the investor’s income tax slab rate.  

On the other hand, tax-exempt fixed-income securities include tax-free bonds issued by government entities such as NHAI, REC, PFC, and HUDCO. The interest income earned on these bonds is tax-free for the investor. 

The taxation of fixed-income investments depends on the type of security and the holding period.  

Interest income from fixed-income securities is subject to the Income Tax Act, where the tax rate depends on the investor’s income tax bracket.  

If an investor holds a fixed-income security for more than a year before selling it, any gain realized from the sale will be taxed at the long-term capital gains tax rate, which is generally lower than the ordinary income tax rate. However, if the security is held for less than a year, any gain will be taxed at the investor’s ordinary income tax rate. 

TDS on Fixed Income Investments 

Tax Deducted at Source (TDS) is a tax collection mechanism for fixed-income investments in India. For example, for a normal resident individual, TDS is applicable on fixed deposits when interest earned exceeds INR 40,000 per annum. TDS rates for fixed deposits vary based on the investor’s income tax slab rate. TDS is also applicable to interest earned on bonds and debentures at 10% (without PAN) or 7.5% (with PAN). 

Indexation Benefit 

In India, the long-term capital gains (LTCG) tax rate on fixed-income investments is 20%. However, investors can reduce their tax liability by claiming the indexation benefit. Indexation adjusts the cost of acquisition of an asset to inflation. Thus, the investor’s capital gains tax payable reduces, providing significant tax savings. 

Fixed Income Investment Strategies for Different Life Stages 

Fixed-income investments are an excellent option for investors of all ages. However, the investment strategy for fixed-income investments may vary depending on the investor’s life stage. 

Young Investors 

For young investors, who have just started their careers, their risk-taking capacity is high, and they have a long investment horizon. They can consider investing in high-yielding fixed-income instruments such as corporate bonds, NCDs, and high-yielding debt funds. However, they should diversify their portfolio to reduce risk and maximize returns. 

Middle-Aged Investors 

Middle-aged investors can benefit from fixed-income investments to balance their portfolios and reduce risk exposure. These investors may consider investing in a mix of taxable and tax-exempt fixed-income securities, depending on their tax bracket and investment goals.  

Middle-aged investors must focus on creating a stable income stream while preserving capital. They can consider investing in tax-free bonds issued by government entities, fixed deposits, and debt mutual funds. They should choose debt mutual funds that invest in high-quality securities with consistent returns. 

Retirement Investors 

For retired investors, generating a regular income stream is crucial. They can invest in fixed-income instruments such as the Senior Citizen Savings Scheme, the Post Office Monthly Income Scheme, and tax-free bonds. They should choose investments with a lower risk profile, which provides a steady income stream to meet their regular expenses. They may also consider investing in inflation-protected securities to protect their income from inflation. 

Rurash Financials prides itself on providing well-researched fixed-income investment recommendations. If you are interested in investing in fixed-income instruments and want to ensure that your portfolio exclusively includes investments with AAA-A ratings from authorized credit rating agencies, we are here to help.  

Contact our Relationship Manager today to learn more about fixed-income investments and how we can help you achieve your financial goals or write to