Tips to Protect Retirement Money From Tax
Whole life you have put in every effort to work to earn and make life beautiful for the family and yourself. You have fulfilled your duties well and have tried your best when it comes to child’s education, marriage, or for further requirements. But you cannot let go of the entire income you have earned in years. This is when people think of tax saving investments plans to multiply money and save a lot at their end. If you are wise enough to plan savings when young and earning, this would be an additional thought when you retire.
Retirement is the time when you do not have a fixed income. Most individuals after retirement have their earnings from rent, capital gains, dividends and pension. The sources of income are limited and expenses are on the rise. Along with the increasing expenditure it is tax that takes away the considerable part of earning. This is why savings become a primary motive.
Let us look at the ways in which you can protect your retirement money. But before that let us understand the implications of tax after retirement.
Tax,whether or not retired, is mandatory to be paid if you are a citizen of India and if you fall in the income bracket (as indicated by Income Tax Act). After retirement, you may not have a fixed income but the total earnings can exceed the tax liability. So, if you do not invest right, half the income will be lost in complying with tax responsibilities.
After retirement, senior citizens have a threshold exemption limit of Rs.3 lakhs per financial year. The limit in case of super senior citizens is Rs.5 lakhs beyond which they are liable to pay income tax.
How to Save Taxes after Retirement?
These are the ways in which individuals can save tax after retirement:
- Invest in Senior Citizens Savings Scheme (SCSS):
The scheme is to help senior citizens keep their income safe from income tax liabilities. The SCSS is a scheme backed by the central government and it offers an interest rate of 7.4% for the January to March 2021 quarter.
Individuals who are above 60 years of age can invest a maximum of Rs.15 lakhs in SCSS. Further they can rely on quarterly interest payouts for regular income. The interest on SCSS is completely taxable but the scheme has a lock-in period of 5 years. The scheme offers one of the highest interest rates talking of fixed income investments. The retired persons can claim a tax benefit of Rs.1.5 lakhs per financial year under Section 80C of Income Tax Act, 1961. SCSS is a preferred investment tool as it provides a dual benefit of interest and tax benefit.
- Equity Linked Savings Scheme (ELSS): Equity Linked Savings Scheme (ELSS) is a tax saving mutual fund. Save for your retirement and get tax benefit up to Rs.1.5 lakhs under Section 80C every financial year. The ELSS scheme has a lock-in period of 3 years which is the shortest time considering other investment options. These bring long-term capital gains of over Rs.1 lakh over which you have to pay tax at 10%.
Under ELSS, you can invest money in lump sum or in monthly installments which start at as low as Rs.500/- per month. The money you pay is invested in equity in a diversified manner that fetches you higher returns.
- Retirement Plans: Retirement plans are life insurance plans that bring for you financial security. Getting money after retirement is important because your active income stops. These plans are insurance cum investment options that build for you a huge corpus of funds for a stress-free retirement life.When in need after retirement, you can withdraw the funds anytime.
A retirement pension plan gives you income tax benefit under Section 80CCC of Income Tax 1961. Under the policy, the death claim proceeds are also exempted from taxes.
Life insurance plan is a good option where you can secure your life as well as plan your finances for the future. It also helps you in tax planning as you get income tax benefits under section 80CCC.
- National Pension Scheme: Investing to save and gain in a government backed scheme is better than anything. This is the scheme in which the individuals invest during their earning years to prepare for pension in retirement. You can get a tax deduction of Rs.1,50,000/- under Section 80C of the Income Tax Act, 1961. Along with this, additional deductions of Rs.50,000/- under Section 80CCD(1B) is also provided.
The lock in period under the National Pension Scheme is up until retirement. The minimum investment under NPS is Rs.500/- in the initial years. The maximum of 50% of the premium is invested in equity whereas the rest amount goes into government bonds, etc.
- Invest in Bank Fixed Deposit or POMIS:
Retirees can invest their portion of retirement funds in Post Office Monthly Income Schemes as they are backed by the government. The interest rate of POMIS is higher and it has a lock-in period of 5 years. You can also invest on bank fixed deposits.
POMIS is safe for those who look for monthly income and are unwilling to take risk on their investments. The maximum limit of investment under POMIS by one individual is Rs.4.5 lakhs. The interest payouts through post office monthly income schemes are taxable.
In comparison to POMIS, bank fixed deposits are a reliable source of income especially after retirement.
- Debt Mutual Funds:
The individuals who look for low-risk options can invest a portion of their retirement funds in debt mutual funds. The debt mutual fund is a tax saving investment tool. Long term capital gains after holding liquid funds for three or more years are taxed at 20% after indexation. Invested in debt mutual funds aids in minimizing tax outgo and improving post-retirement income helping people maintain current standard of living.
- Health Insurance Plans:Buying a health insurance plan does not have an aspect of saving taxes. It also indicates that you are conscious and worried of collecting funds for health insurance. Inflation has affected the cost of healthcare that ultimately impacts your savings. When you get old, the money outflow on the account of medical treatments increases. This is why buying health insurance plans is a wise option.
Other than buying a health plan to get monetary support in hospital bills for treatment, you must buy an insurance policy for getting income tax benefit under Section 80CCC.
- Public Provident Fund (PPF): Public Provident Fund is a small saving in the form of investment that also fetches return on it. These are savings-cum-tax saving investment tools that enable you to build a corpus for retirement. PPF are long term investment options that bring for you an attractive rate of return. Both interest and returns are not taxable under Income Tax. To avail the benefit, you need to open a PPF account under the scheme.
The interest rate on PPF accounts is 7.1% which is higher than 6.8% which is available on National Savings Certificates.
Confused with the multiple options of investment?
If yes, then reading further is a must.
How to Choose Tax Saving Investments tools?
When choosing tax saving investments, you can divide the corpus into different sections. You can pick insurance policies that give you tax benefits. Apart from the tax benefits, you must also bear in mind the percentage of funds that should be invested for growth also like ELSS and mutual funds.
The main idea is to maximise the tax deductions on your contributions under Section 80C (SCSS, ELSS, tax saver fixed deposits, etc.), Section 80CCC(retirement policies), and Section 80D (health insurance policy). You can also save through tax-free returns via Public Provident Fund, tax-free bonds, etc.
Protecting retirement savings is the main intent no matter which route of investment you choose. The idea is to invest the money and create a fund so that you never fall short of money especially when your active income stops. Before making the investment, decide the requirements for your future, tax liability, and the returns that you will get. If still unclear, you can connect with a financial advisor or your income tax expert.