After hustling for 3 to 4 decades, there comes a time when you can finally hang up your shoes and breathe a sigh of relief at a life well spent and responsibilities well carried out. Yes, it’s retirement – a time that you can utilize for yourself.

In order to enjoy a stress-free retired life, you need to have a retirement fund that will not only meet your current living expenditure but also be sufficient to cover any unplanned expenditure or constantly rising price levels in the later years.

Inflation and taxes are the two biggest enemies of retirement fund investments. Even a sizable retirement corpus is shrunk in value as the money consistently drains out of these two loopholes over time.

While an investor won’t be able to completely control the tax structure and the inflation, he can plan the investment of his retirement fund in such a way so that the rate of return on his investments is more than the inflation. Also, he should ensure that the amount he pays as a tax after retirement is minimum.

To counter the impact of inflation, the choice of investments has to be more aggressive, market-linked, growth-oriented. This will ensure returns higher than inflation. Now, let’s see how to minimize the outflow of investment income towards tax:

  • Identify the sources of income post retirement:
  • The Income Tax Act, 1961 in India considers individuals above the age of 60 as ‘senior citizens’ and those above the age of 80 are ‘super senior citizens.’ These citizens, after retirement, may receive pension, salary from any other job they may take up, rent from house property, dividend and interest from the investments and capital gains on the sale of assets.

  • Understand the tax implications of various sources of income:
  • The basic exemption limit for senior citizens in India is Rs. 3 lakhs. The same for super senior citizens is Rs. 5 lakhs. This means that if their total income from various sources mentioned above exceeds these limits, then they will have to pay tax.

    However, while calculating the total income from various sources; the tax rules for every such category also have to be considered. If the senior citizen has accepted another job, their salary will be subject to the deduction of TDS (tax deducted at source) rules as applicable to their organisation.

  • Plan the investments and the distribution of income therefrom in a tax-efficient manner:
    • For fixed and stable income, senior citizens may invest in fixed deposits, PPF, ELSS (equity-linked saving scheme), Senior Citizens savings scheme or National Savings Certificates. The investment in these avenues is eligible for deduction u/s 80C up to Rs. 1.5 lakhs.
    • Deduction of up to Rs. 50,000 is available towards health insurance premium u/s 80D.
    • Deduction of up to Rs. 50,000 is allowed u/s 80TTB on the interest earned upon various bank FDs, savings accounts and post office deposits. Dividend income below Rs. 5000 from mutual funds is exempt.
    • Long term capital gains on the sale of mutual funds units are exempt up to Rs. 1 lakh and are taxed at the rate of 10% above that. Similarly, the short term gains are taxed @15%.
Thus, investing in various asset classes will ensure stable growth of income and minimum tax outflow.

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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