Wed. Oct 5th, 2022

Retirement is a phase of life when income sources are almost non-existent, but with the right planning, you still can enjoy a stable income. A retirement fund is something that comes in handy to meet your daily expenses and unplanned expenditure in your post-retirement years. In this process, you can make use of the different types of life insurance policies that not just provide protection for your life, but also act as an investment avenue to grow your money. Additionally, pension plans are a smart way to ensure consistent income even after you have quit working to enjoy your golden years.

Accumulating the retirement fund is a job half-done, as you need to invest it in the right avenues to earn returns that beat the inflation levels. Further, even if you do not invest your retirement fund in different financial products, you still need to pay tax thereon. Hence, building a retirement portfolio that not just meets your expectations on returns, but also avoids taxes is the challenge.

Here are some tips on how you can safeguard your retirement fund from tax erosion –

The first step in managing the taxes on your retirement fund is to understand the implications of tax from different sources. Since taxes have a significant impact on the total income, especially during post-retirement days, it is important to know how it impacts the different investments. For starters, you should be familiar with the fact that the threshold exemption for senior citizens (above 60 years) is set at ₹ 3 lakhs, whereas the same is set at ₹ 5 lakhs for super senior citizens (above 80 years).

Investing in financial products that offer a tax-free return or maturity amount is essential to keep your money away from tax implications. The various types of life insurance policies that offer dual benefits of investment and protection are a nifty way to avoid tax on the maturity amount, which can contribute to your retirement fund. Further, tax-free bonds that have a long-term maturity with interest rates that range between 5.5% to 6% are a stable way to grow the retirement corpus while ensuring that the returns remain tax-free.

Investment in Senior Citizens Saving Scheme

The Senior Citizens Saving Scheme or SCSS is a smart way of ensuring that your investments contributing to your retirement funds are backed by the central government. These investments in SCSS offer a deduction under Section 80C, while also providing a guarantee that capital erosion won’t happen. SCSS also offers some of the highest interest rates for fixed-income investments with a maximum deduction of ₹1.5 lakh every financial year. Thus, both objectives of retirees, tax-savingsand a stable income, are met under an SCSS.

Investment in Post office schemes or bank fixed deposits

Since capital protection is necessary when it comes to retirement funds, a secure investment like a post office monthly income scheme (POMIS) can be useful to earn stable returns. POMIS is a government-backed scheme that offers a higher interest rate than traditional bank fixed deposits but has a lock-in period of five years. It is a way by which retired people willing to earn stable risk-free income can take advantage. As an individual, you can invest ₹ 4.5 lakhs or ₹ 9 lakhs jointly. While this is a stable way to earn on your investments, the interest payouts are taxable.

Bank fixed deposits (FDs) are a reliable way to have your retirement fund parked. The safety and flexibility of these FDs make them a preferred choice for many investors. When it comes to interest, bank FDs provide a 0.5% higher rate of interest to senior citizen depositors as compared to the normal interest rate. Thus, individuals who fall below the basic threshold limit can take advantage of both these schemes, POMIS and FDs, as the returns from them are taxable. A higher threshold will benefit these people by not requiring them to pay taxes despite the income being taxable.

Investment in Debt mutual funds

Investing a significant portion of your retirement funds in debt mutual funds has several retirement benefits. In comparison to equity mutual funds, debt funds invest in low-risk options like debt securities and money market instruments with a maturity period of 91 days. Further, they are also tax efficient in comparison to bank FDs. The purchase price of these debt funds on long-term gains is adjusted according to inflation, thereby offering indexation benefits.