Individuals work hard to build a retirement fund to meet daily expenses and unexpected expenses after retirement. It is a job half done because your money has to yield a return above inflation. Plus, you still have to pay taxes if you don’t invest your pension fund in the right financial products. The challenge is to build a retirement fund to meet a longer life expectancy and keep tax debt at bay.
Let’s take a look at some tips for protecting your pension fund from tax erosion:
Understand the tax implications of the different sources of income
“Taxation is an important factor after retirement because income can easily exceed the exemption limit for seniors. You have an exemption threshold of Rs3 lakh per fiscal year for seniors and Rs5 lakh for super seniors under the old tax system, ”said Archit Gupta, founder and CEO of ClearTax.
Invest part of your retirement fund in financial products whose annual outflow, or amount at maturity, is tax-exempt. For example, retirees can invest in tax free bonds where interest payments are tax free.
Gupta said, “You can choose highly rated bonds for the safety of the investment. In addition, the interest offered by the non-taxable bonds varies from 5.5 to 6.5% per annum. Non-taxable bonds have a maturity of 10 to 15 years. It is suitable for retirees who do not need funds immediately and who fall into the highest tax brackets. “
Invest in the savings plan for seniors (SCSS)
You can invest part of your pension fund in the Senior Citizens Savings Scheme, or SCSS. It is a safe investment for seniors because it is supported by the central government. It currently offers an interest rate of 7.4% for the quarter from January to March 2021.
Retirees over 60 can invest a maximum of Rs15 lakh in the SCSS and rely on quarterly interest payments for regular income. It has a five-year lock-in period and SCSS interest is fully taxable.
“SCSS offers one of the highest interest rates among fixed income investments. It also offers retirees a tax deduction of up to a maximum of Rs 1.5 lakh per fiscal year under Section 80C of the Income Tax Act. The high and assured income as well as the tax advantage make SCSS a suitable investment for retirees, ”said Gupta.
Invest in POMIS or FD bank
Retirees can invest part of the pension fund in the Post’s Monthly Income Scheme (POMIS) if they are below the tax exemption limit. This is a government backed program that offers a higher interest rate than bank FDs and has a 5 year lock-up period.
Retirees can invest a maximum of Rs4.5 lakh individually, or Rs9 lakh jointly, in POMIS. It is suitable for investors who are looking for a fixed monthly income and do not want to take any risk in their investments. However, interest payments are taxable and have lower returns for those in the higher tax brackets.
Bank FDs are a reliable source of retirement income. Security and flexibility of tenure make it a suitable option for parking part of the pension fund. “Banks offer seniors about 0.5% higher interest rate per year. Retirees who are below the basic tax exemption limit or fall into the lower income tax bracket can invest in POMIS and FD banks, ”Gupta said.
Debt mutual funds offer tax-efficient income
Retirees could invest a portion of the retirement fund in liquid mutual funds. This is a low risk option that invests in debt securities and money market instruments with a maturity of 91 days. In addition, it is a tax-efficient investment compared to bank FDs.
Gupta said: “Long-term capital gains after holding liquid funds for three years or more are taxed at 20% after indexation. It adjusts the purchase price of the investment to the effects of inflation. Indexation benefits significantly reduce tax obligations for retirees in the highest tax brackets. “
Individuals should plan their investments and the distribution of income after retirement in a tax-efficient manner. It minimizes tax expenditures and improves income after retirement, helping retirees maintain their current standard of living.
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