Many individuals spend a lot of time and energy planning for their retirement. During retirement years, the lack of an income means one is left with no regular flow of money unless one has planned effectively. There are various schemes and plans in the market which are retirement-oriented, and which aim to provide returns in a manner that acts as income replacement. However, in the aim to get more returns, one should not forget another vital aspect of retirement planning: tax saving. If you do not invest in the right instruments, then you may be at risk of losing your returns to taxes. To help you out, we provide 3 tips that can help you protect your retirement funds from tax erosion.
Understand tax deductions and exemptions limits
A wonderful benefit of the tax system is that one can save on their taxes by investing in/ purchasing certain financial products. For instance, Section 80C lists down a host of products, such as a pension plan or an ELSS scheme, that can help you claim tax deductions up to Rs 1.5 lakhs. Similarly, Section 80D offers deductions up to Rs 25,000 against health insurance premiums.
Now, as a senior citizen, you receive a higher deduction/exemption limit. For instance, you can claim up to Rs 50,000 on your health insurance premiums rather than Rs 25,000, which is applicable for those under 60 years only.
If you are following the old tax regime, then the exemption limit for senior citizens (those in the 60-80 years age range) for a year is Rs 3 lakh. For super senior citizens (over the age of 80 years), this limit increases to Rs 5 lakhs a year. Under the new tax regime, the exemption limit is Rs 2.5 lakhs for senior citizens as well as super senior citizens. Thus, you must invest in products such that the returns are tax-exempted as per the limit applicable to you, in accordance with the regime you have chosen. Note that major deductions and exemptions are only applicable to the old tax regime.
Invest in an annuity plan
If you use a retirement calculator to receive the estimate of how much you may require during your retirement years, the figure may surprise you. People often tend to underestimate their expenses during retirement. That is why diversifying your investments is important; it helps accelerate your income as well as save taxes. An annuity plan can act as an effective way of hitting both targets with one stone.
Annuities work in the following manner: you invest a considerable amount of money either a few years or several years before your retirement. This money is then returned to you in the form of pay-outs after you retire at the frequency of your choice.
When you invest in an annuity plan, also called a pension plan, you can claim for Section 80C deductions up to Rs 1.5 lakhs in a year against the money you pay for it. To maximise your tax savings, you can limit your annuity pay-outs such that they come within the exemption limit applicable to you. What’s more, from the corpus received from the pension plan after retirement, one-third of the corpus is tax-exempted.
Consider opting for schemes provided by the government
There are various retirement schemes provided by the government, such as the Senior Citizens Savings Scheme, which is central government-backed. This scheme has an appealing interest rate as well, which can ensure you receive good returns during your retirement. Another government-backed scheme that can help you in this regard is the Post Office Monthly Income Scheme. One can invest a maximum of Rs 4.5 lakhs individually or Rs 9 lakh in a joint account within this scheme.
When planning your retirement asset allocation, take the help of a retirement calculator. One should look at the pros and cons of each product and take a decision accordingly. Avoid investing in products that do not yield returns in a manner suitable for you simply because rank high on the tax-saver list.
Tax benefits and other aspects are subject to amendments in tax laws. Consult a tax expert before making any major financial decisions during your retirement planning.