Retirement Planning through Tax Planning | SBS FINANCIAL ADVISORY |
Retirement means the end of your working period. It also means the end of the earning period. But to maintain the set lifestyle, a continuous flow of money i.e. regular income is a basic need. To efficiently do so, one has to foremost determine your retirement cash flow needs, 30–35 years down the line. And then identify your sources of income. Determine how much pension income you will receive with your current plans. And then plan things out accordingly. Having said that, building a retirement portfolio with a mix of fixed income and market-linked investments remains a big challenge for many retirees. But not when you know how to build a retirement portfolio with tax efficient plans. This post will help you get an overview of the same.
Opt for Pension Plan Tax Benefits.
Depending on the plan chosen, pension plans provide tax benefits along with a lump sum amount. Under Section 80CCC, any contributions towards pension funds can be deducted from the gross income, leading to tax savings. And the great news is at the time of withdrawal, you can withdraw one-third of your accumulated pension funds without paying any tax! This traditional plan may not give you a higher return but provides a stable return.
Health is wealth — Prioritise that
Unexpected and large expenses like medical contingencies need to be accounted for before you estimate your regular income need, else these expenses can eat into your retirement savings. Many who retire, especially in India, don’t plan for medical insurance at all. With health costs rising, this is a risk that needs to be covered. Most health plans come with tax advantage, which typically grow tax-free and can be withdrawn without incurring taxes when used toward qualified medical expenses.
Diversify your savings
Try to split your retirement savings efforts among three different buckets — diversification is key.
- Tax-free- Think of the traditional plans where you put in after-tax savings that then grow and can be withdrawn tax-free in retirement.
- Taxable- This bucket includes options such as brokerage or mutual funds accounts and savings, where you’re taxed on interest, dividends and/or gains.
Having a mix can also help you better control your tax situation in retirement because you have more flexibility on how much you withdraw, from where. Diverse savings could also be key if you plan to retire early.
Keep in mind the Tax treatment of Mutual Fund Retirement Plans before investing.
Investment in Mutual Fund Retirement Plans is subject to tax deduction under Section 80C of Income Tax Act for mutual funds retirement plans (most plans). However, the maturity proceeds of retirement plans are not entirely tax free. Non equity oriented mutual funds, i.e. the mutual funds where equity allocations are less than 65% are subject to debt fund taxation. Long term capital gains for non equity mutual funds are taxed at 20% after allowing for indexation benefits. Indexation benefits allow you to adjust the acquisition price of units by the ratio of cost of inflation index in the year of redemption and the year of purchase. As a result although long term capital gain for income tax purposes is not tax free, it is lower and hence the tax obligation is also lower compared to many other fixed income investments, for instance fixed deposits.
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Originally published at www.sbsfin.com on March 16, 2019.