Retirement planning is an integral part of financial planning. This is to ensure a secure and comfortable future post retirement life. With rising cost of living and increased life expectancy, individuals need to ensure that they have adequate financial resources to maintain a stable post-retirement life.
This involves setting aside funds during working years, to create a financial corpus for the retirement phase and to ensure a steady income. While evaluating various available options, it is important that one considers tax benefits as well.
Tax benefits on savings under retirement plans
In India, there are several retirement plans which offer tax benefits. Some are indicated below:
Provident Fund (PF): A common retirement plan for employees, PF offers a lump sum corpus post retirement. PF contributions qualify for a tax deduction of up to Rs 1.5 lakh u/s 80C of the Income Tax Act, 1961, and withdrawals are tax-free at the time of retirement, provided the employee has had 5 years of continuous contribution.
Voluntary Provident Fund (VPF): It is a voluntary contribution from an employee towards his Provident Fund (PF) account, beyond the normal mandatory contribution of 12% and is eligible for tax deduction within the overall limit of Rs 1.5 lakh u/s 80C of the Income Tax Act, 1961. Similar to PF, withdrawals are tax-free at the time of retirement provided the employee has had 5 years of continuous contribution.
Employee Pension Scheme (EPS): The scheme provided by the Employees Provident Fund Organization (EPFO) provides pension for employees after their retirement. However, the taxability and exemption will depend on commuted or uncommuted pension at time of withdrawal.
National Pension System (NPS): This is an optional pension plan. Contribution to NPS is eligible for deduction under the Income tax Act, 1961. At the time of retirement, lump sum withdrawal up to 60% of corpus is exempt from tax and any amount utilised for purchasing annuity shall also not be taxable. Regular annuity income, however, would be taxable.
Equity Linked Savings Schemes (ELSS): This is a tax saving mutual fund investment with a lock-in period of 3 years. Tax deduction under Section 80C up to INR 1.5 Lakh is available for the investment made.
Public Provident Fund (PPF): A government backed investment scheme with a lock-in period of 15 years, deposits in PPF are eligible for tax deduction up to INR 1.5 lakh u/s 80C. PPF interest and maturity amount are tax-free.
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Senior Citizen’s Saving Scheme (SCSS): This scheme qualifies for tax deduction up to INR 1.5 lakh u/s 80C; tax-free bonds provide long-term, tax-free returns and are considered ideal for retirement.
Listed bonds are debt securities that are listed on a recognised stock exchange. On listed bonds held for more than 12 months, long term capital gain rate at 10% without indexation, is applicable.
Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. Capital gains arising from the redemption of SGBs are exempted from capital gains tax, provided the investment is held till maturity of 8 years. Long term capital gains on redemption of SGBs before maturity will be taxed at 20% with indexation benefit.
Shares and mutual funds are also considered for retirement planning. It is crucial to be aware of potential tax implications upon withdrawal. If the holding period of listed equity shares or equity-oriented mutual fund is more than 1 year, it will be considered as long-term asset; gains in excess of INR 1 Lakh will be taxed at 10% without indexation. Non–equity oriented mutual funds, acquired before 01 April 2023, and with holding period of more than 3 years, are considered as long-term capital asset and taxed at 20% with indexation benefit. Non equity mutual funds acquired on or after 01 April 2023, would be considered as short-term capital asset, irrespective of the tenure of the holding period, and will be taxed at normal applicable rates.
Traditional options such as Recurring Deposits (RDs) and Fixed Deposits (FDs) are taxed at applicable slab rates of individuals. One needs to keep in mind that senior citizens can avail deduction for interest income from deposits (both savings and term) with banks or post office or co-operative banks of an amount up to INR 50,000.
One also needs to keep in mind the slab rates which could be applicable post retirement. For individuals aged 60 years and above and up to 80 years, basic exemption limit of INR 3 lakh is applicable under both the old tax regime and the new tax regime. For individuals aged 80 years and above, the basic exemption limit of INR 5 lakh is applicable under the old tax regime. Pensioners can claim a standard deduction of INR 50,000 from their salary/pension income under the new income tax regime.
One also needs to be mindful that tax deductions at time of contribution would be available to individuals who opt for regular tax regime, except for employer contribution to NPS, which would be available under both regimes (regular as well as simplified).
How essential it is to evaluate the tax implications and future returns and importance of post-retirement investment management
Post-retirement investment management is crucial in India, considering the tax implications. Understanding the tax treatment of pension plans, annuities, and withdrawals is key to maximizing the income after tax. Considering factors such as long-term capital gains on equity and the tax implications of different instruments is essential. As such, it is imperative to check the withdrawal rules and restrictions along with potential tax rates applicable at time of receipt of lump sum/ annuity income for managing overall tax liability.
In summary, post-retirement investment management in India is not just about growing wealth but also about navigating a tax-efficient path. There should be a retirement plan that earns regular income after retirement, guarantees lifelong income and provides tax savings on investment. A well-thought-out strategy ensures that retirees can enjoy the fruits of their labor while minimising the impact of taxes on their financial resources.
