Your professional life goes on with many ups and downs. At the end of your working life, you wish to relax and expect utmost financial security. You might be spending hours thinking about how to save for retirement. But the question arises— “Whether your financial worries come to an end with your aggregate savings?” Certainly not.
There is a major aspect that eats up a huge chunk of your savings— Tax. It feels disappointing while various taxes narrow down your hard-earned saving for retirement. Hence, you must work on tax-efficient financial planning so that to enjoy complete financial freedom after your retirement.
Three Taxes After your Retirement you must Plan for
Your tax scenario may change a little after you retire, as your many long-term investments mature, and your investment preferences change. Apart from the regular pension, the following incomes may form a part of your taxable income:
a) Rental income from house propertyb) Income from the sale of assets, i.e., capital gainsc) Tax on other incomes
I. Tax on Income from house property
Rental income can form a major part of your post-retirement income. For tax purposes, this income is classified as income from house property.
Rental income from house property increases your gross taxable income. The income tax will be charged as per the income tax slab.
II. Tax on capital gains
Capital gains shall be taxable in the following cases:
- The asset transferred is a capital asset;
- If you have transferred it during the previous year;
- If you’ve gained certain profits or gain from the capital transfer.
Capital gains will be assessed based on the holding period of the asset and classified as long-term or short-term capital gain.
Here’s how these capital gains will be identified for taxation:
|Type of investment||Long term Asset||Tax Treatment on capital gains||Short term Asset||Tax Treatment on capital gains|
|Equity funds (Listed); Equity-oriented hybrid funds||More than 12 months||Taxable @ 10%, if more than Rs 1lakh||Less than 12 months||Taxable @ 15%|
|Equity funds (unlisted)||More than 36 months||Taxable @ 20% after indexation; 10% before indexation.||Less than 36 months||Taxable @ 15%|
|Debt funds and debt-oriented balanced funds||More than 36 months||Taxable @ 20% after indexation||Less than 36 months||Taxable @ 15%|
What is Indexation?
Indexation is a benefit based on the inflation rate in the country. Indexation allows a rebate on the capital gain for the inflation cost. Thus, indexation reduces your taxable capital gain amount.
When Is Indexation Not Available?
The benefit of indexation is only available for LTCG. However, it is not available in the following cases:
- Non-resident or foreign companies: LTCGs from the transfer of unlisted securities.
- Gains from transfer of listed Equity securities: LTCGs of more than Rs. 1 Lakh from Equity share or equity-oriented funds
How does Indexation on LTCG Work?
Indexation adjusts the purchasing price of an investment in such a way that reflects the impact of inflation on it. The more the purchasing price of an investment, the lower will be the gains on it. Hence, lower will be the tax on it.
The inflation rate used for indexation can be obtained from the Cost Inflation Index (CII) table published by CBDT every year.
Here's the formula for calculating Indexed Cost of Acquisition (ICoA):
ICoA = Actual Cost of Acquisition x (CII of the year of sale / CII of year of purchase)
For example, you had invested Rs 10,000 in an equity fund in August 2019, at the NAV of Rs 10. You redeem your investment in FY 2021-22 at NAV of Rs 20/-, i.e., the value of the investment is Rs 20,000.(The CII for FY 2021-22 is 317, and for FY 2019-20 is 289)
Now, ICoA = 10,000 X [317/ 289] = 10,969
Hence, after indexation, your capital gains shall be 9031 (20000-10969). 20% Tax shall be charged on this amount.
The tax rate for short-term capital gains from transfer of Equity Shares, Equity Oriented Funds shall be taxed at 15% u/s 111A of the Act.
III. Tax on Other Incomes
Dividend and interest form a major part of your post-retirement income. Dividend and interest incomes from interest-bearing securities will be taxable as given below:
- If you have invested in equity shares, your dividends earned would be taxable at 10%.
- This rate was lower at 7.5%, for dividends received between 14th May 2020 and 31st March 2021.
- However, make sure you submit your PAN details to the payor. If you have not provided your PAN, the payor must deduct tax at source (TDS) at a rate of 20%.
Lower your Taxes after Retirement
You have worked hard to increase your saving for retirement, but that’s not enough. Once you will retire and look at your savings corpus, you might feel satisfied that you have enough money for a happy life ahead. But wait, there is a huge percentage of taxes charged to it. A regular tax-free income is what you need the most after your retirement.
There are two ways you can reduce the burden of taxes on your retirement income:
1. Minimize your taxable income
If you don’t want the government to get a huge portion of your savings as tax, it’s time for you to do plan your finances in a tax-efficient manner. A little bit of tax planning will minimize your taxable income and will help you maintain a handsome amount of saving for retirement.
Under the current provisions, the minimum taxable income is Rs 2.5 lakhs. Although, your tax liability can be zero for taxable income up to Rs 5 lakhs as you can avail rebate under section 87A of the Income Tax Act.
Thus, you can have a taxable income of up to Rs 5 lakhs in a year as per current provisions.
2. Maximize your non-taxable income
Next important thing is to maximize your non-taxable income. You can do so by investing your savings into long-term investments, on which you can claim a tax deduction.
How to maximize non-taxable income?
A. Guaranteed Income4Life Plan
If you are 40 years or above, you can choose the Canara HSBC Life Insurance Guaranteed Income4Life plan. In this pension plan, you can opt for the long-term income option of 15 or 20 years, or the lifelong income option till 99 years of age.
If your annual investments in this plan remain 10% of the life cover in the plan, you can receive a tax-free pension from this plan.
B. Invest 4G ULIP
This is a smart ULIP where you can opt for the Century Option with a systematic withdrawal feature. Hence, your plan can continue till you achieve the age of 100 years.
Thus, you can invest and build your retirement corpus until your retirement and then opt for systematic withdrawal to receive a pension. Since your partial withdrawals from a ULIP after the lock-in period are tax-free, your pension will be tax-free.
Just take care of the following conditions to ensure a tax-free income after you retire:
- Annual investment should never exceed 10% of the life cover amount of the plan, and
- Total investment in the plans bought on or after 1st February 2021 does not exceed ₹ 2.5 lakhs.
So, these are some of the tax-saving retirement planning steps that can help you increase your saving for retirement.