Ways to Protect Your Retirement Investments

Retirement provides you with an access to a lumpsum, thanks to the provident fund that has accumulated over the years. In addition, you may have invested in other saving schemes so that you have enough money to make the most of your golden years.

If you’re thinking that your days of financial planning are over with this, and you can sit back and relax, you may be far away from the truth. Most of your saving is subjected to taxes according to your tax slab, unless you’re investing them in the right pockets.

Incomes and Taxes after Retirement
You may not be earning a fixed monthly salary, but that isn’t your only source of income.

You need to pay tax on the income you receive from property like rent, capital gains, and interest and dividend from fixed-income and equity investments.

Even if you receive pension, you should pay tax. The slab varies for every age group, and depends on your payout frequencies.

If you were a Government employee and you received lumpsum pension, you don’t need to pay tax. For Non-Government employees, half the amount is exempted from taxes, if you haven’t received gratuity and one-third is exempted, if you have. Non-commuted pension is taxed, according to your tax slab.

Here’s a detailed guide on how you can protect your retirement funds from taxes, assuming that you’ve not taken up any job after retirement and your sources of income are rent, pension, interest earnings etc.

Investing your Retirement Funds
After retirement, you need to depend on saved-up funds for your livelihood. You can also consider growing your savings, by investing prudently. Here are some of the factors,to keep in mind while doing so:

  • Security of your funds
  • Liquidity
  • Returns from your investments
  • Payout frequency

Whether you retire at age 58 or earlier, through Voluntary Retirement Scheme, you should plan for the future. Current life expectancy is around 80 years, so your funds should last for decades, and keep up with the rising cost of living over the years.
Even after retirement, you can plan for capital growth, and safety. Consider how taxes will affect your returns on investments, and leverage the tax benefits on different schemes to preserve your retirement funds.

How to save on taxes?
You can protect your hard-earned savings from tax erosion, by investing in some of the best tax-saving investment avenues. Here are someinvestment options can help you protect your savings from taxes:

  • Tax-free Fixed Deposits
  • Senior Citizens Savings Scheme
  • Public Provident Fund
  • National Savings Certificate
  • Equity-Linked Saving Schemes
  • Mutual Fund Investments
  • Life Insurance Plans
  • Health Insurance Plans

How should you choose your investments and savings?
You can consider dividing your corpus into different sections, some of which can be put in low return but secure investment options like Fixed Deposits and PPF, and others that can be invested in Insurance.
A small but adequate percentage of the funds should be invested in growth-oriented investments like ELSS and Mutual Funds./p>

If you’re looking for low-risk avenues, consider these investment options:

Fixed Deposits
With Fixed Deposits, there is a fixed lock-in period. While you cannot break the deposit, you can always get a loan against your deposits, offered by certain NBFCs. The principal amount you deposit in a tax-saver FD qualifies for tax deduction under Section 80C of the Income Tax Act. The interest earned is, however, taxable.

Public Provident Fund (PPF)
If you retire early, through VRS, this may be a good place to park some of your funds. You can invest up to Rs.1.5 lakhs in a single year. The deposit each year is eligible for tax deductions under Section 80C, up to a maximum of Rs.1.5 lakhs for all allowed deductions under this section.
This is a long-term scheme, for 15 years. However, after five years, you can make partial withdrawals. The returns are tax-free.

Senior Citizens Savings Scheme (SCSS)
As the name indicates, this is a savings plan designed for senior citizens. You can make an investment of up to Rs. 15 lakhs under this scheme. There is no limit on the number of SCSS accounts one can create, but the total investments across all these accounts cannot exceed the cap of Rs. 15 lakhs.
The deposit amount in each SCSS is eligible for tax deduction under Section 80C. The tenor of investment is five years. However, after one year, you can make partial withdrawals. The premature withdrawal charges are 1.5% of the deposit, if you withdraw after one year. After two years, this charge reduces to 1% of the deposit.
SCSS offers the option to get quarterly interest payouts, to create a regular income stream for retirees.

National Savings Certificate (NSC)
NSC is a scheme with a lock-in period of 5 years. You can buy any number of NSCs. They are eligible for tax deduction under Section 80C, within the limit of Rs. 1.5 lakhs per year.
The interest earned on NSC each year is not paid out, but reinvested. Thus, the initial deposit and the reinvestment are both tax-free and the interest is compounded. Only the interest earned in the final year, is added to your income and taxed according to your tax slab.
If you’re looking for growth-oriented options, consider investments like ELSS and Mutual Funds, which also provide tax benefits.

For Growth Oriented Investments
Investing in ELSS and Mutual Funds is a good option as they also offer tax benefits.

Equity Linked Savings Scheme (ELSS)
These investments provide higher capital growth for your retirement funds, to keep up with the rising cost of living. Your investments in ELSS are eligible for the Section 80C tax deduction, up to a total limit of Rs.1.5 lakhs for each financial year.
ELSS have a lock-in period of just three years. If you choose Dividend plans, this can become an income stream, with payouts whenever the fund offers dividends, and you’ll even get the money during the lock-in period.
All returns on investments in an ELSS, are tax-free. So, this scheme not only offers chance for capital growth, but also tax-free returns.

Investing in mutual funds outside of ELSS
You can choose to invest in some equity mutual funds or a mixed fund that invests partially in equities, and partially in debt instruments. You can choose Debt Mutual Funds to lower risks. Whatever type of fund you choose, if you redeem after a year, the dividends and returns from MF are tax-free.

General investment tips
To sum up, there are a lot of claims on your Section 80C tax deductions. So, while investing in ELSS SCSS and other such schemes, do not invest everything at once.
Invest in FDs for one or two-year terms and when they mature, invest in ELSS and SCSS and other plans across a few years, to get maximum tax benefits under Section 80C. Unless you have an emergency need for funds, don’t touch your growth fund investments.
Even if you need funds, use low return savings like Bank FDs, SCSS etc. Growth Funds need a longer time, around five years, ten years and above to give you real benefits. Leave them untouched for as long as possible
In traditional plans the maturity amount and death benefits are both tax-free. So, even if you outlive the term of the insurance the sum assured payout is tax-free.
Invest in Health Insurance plans for yourself and your spouse. Health Insurance Premiums up to Rs 20,000 (for senior citizens) in a year, is eligible for tax exemption under Section 80D. If you take separate Health Plans for yourself and your spouse (if you are both senior citizens) you have the potential to save up to Rs. 40,000 in taxes.
Invest in Monthly Income Schemes (MIS) and Monthly Income Plans of Mutual Funds, to ensure a regular income. The interest rate for senior citizens for post-office MISs is 8.5%. However, the interest earned is taxed according to your tax slab. It is ideal for senior citizens as their threshold income is Rs. 2.5 lakh or people who fall under the 10% tax bracket.
If MISs aren’t tax efficient for you, invest in Monthly Income Plans of Mutual Funds. These invest in equity and debt and offer regular income through dividend payouts.
You have many ways to save your retirement funds from taxes - through savings schemes, through investments in growth funds, through investment in essentials like life insurance and health insurance. Carefully plan your investments across all options. Make your investments in tax-saving instruments across several years, so that they do not exceed the upper cap on deductions or exemptions.

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