Guide to Protect Your Retirement Funds from Tax Erosion

Every working individual works hard throughout their life to fulfil their responsibilities and to accumulate a sufficient retirement fund which they can use in the old age. Retirement planning should be an integral part of your monthly financial budget and it should start as soon as you get your first salary.

When you invest in a retirement from an early age, you get the benefit of time to let your money grow with compound effect and accumulate a large corpus that you can use for daily expenses. However, invest in retirement schemes is only half the job done. You must choose the right schemes that yield inflation-adjusted returns.

The real challenge that most people face with their retirement plans India is reducing their tax liability. If you are worried that taxes will eat a significant portion of the returns from your investment, here are a few tips to protect your retirement fund from tax erosion.

Understand the tax implications of various income sources

Tax is an integral part of the investment process. And when you are looking to build post-retirement source, the returns earned can exceed the exemption limits. As per the tax laws, senior citizens in India have an exemption limit of Rs. 3 lakhs in a financial year. This means if your returns exceed the amount, you must pay taxes as per your tax slab.

Tax payments can take away your income, and therefore, it is vital to choose the invest wisely in funds where the returns are exempted from tax. For instance, you can invest in NPS (National Pension Scheme) or tax-free fixed deposits where the interest is completely tax-free.

Invest in fixed deposits

Fixed deposits are a popular investment choice among the senior citizens as it assures capital safety and fixed returns. While the FDs come with a fixed lock-in period, you can get a loan against the amount for emergency. The principal amount deposit is tax-saving FD scheme is totally tax-free under Section 80C of the Indian Income Tax Act, the earned is tax-free only to a certain limit.

Invest in PPF

If you are looking for a risk-averse investment option, if you retire early through VRS, PPF could be an excellent option to park your funds. You can invest up to Rs. 1.5 lakhs in a single year and the deposits are eligible for tax benefit under Section 80C of the IT up to a maximum limit of Rs. 1.5 lakhs.

PPF is a long-term scheme with lock-in period of 15 years. However, you can withdraw the funds partially after five years and the returns are totally tax-free.

National Savings Certificate (NSC)

NSC is a government-backed investment scheme that has a five-year lock-in period. You can more than one National Savings Certificate and the investment in such schemes are eligible for tax deduction under Section 80C of the IT Act up to a maximum 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 amount are both exempted from tax and the interest grows with compounding effect.

Final Word

Thus, careful planning and choosing the right investment option is the key to protecting your retirement funds tax erosion.

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