What tax benefits are there on saving for retirement?

Retirement – they call it the golden years of your life, and rightly so, because you have earned it. After all the hard work and toil, retirement is the stage where you can relax with your spouse, grandchildren and pursue your hobbies. But to really enjoy those golden years then, you need proper retirement planning now.

With increasing life expectancy and rising living and healthcare costs, many seniors now face the problem of outlasting their retirement savings. Perhaps, they or whoever responsible – it could be their wealth advisor, their children or any family member – made a flawed retirement savings plan and now they have to suffer. Usually, people forget to take into account the fact that retirement saving tax and inflation can gradually erode their corpus.

Therefore, it’s important to consider tax benefits offered by various investment instruments for retirement planning. If you keep returns as the sole criteria, you may miss the boat. Learn how you can maximize tax benefits on your retirement savings with these investment instruments.

4G ULIPs

ULIPs or unit linked insurance plans provide investors with dual benefits of insurance protection and high market-linked returns. With Invest 4G ULIPs, they have become even more cost-effective and tax efficient. If you are saving for retirement with a 4G ULIP plan, you can enjoy maximum tax benefits.

For instance, Invest 4G ULIP Plan from Canara HSBC Life Insurance allows you to secure the future of your loved ones and helps you reach your retirement goals while protecting your savings from tax.

Premiums paid on Invest 4G ULIP plan are eligible for tax deductions of up to 1.5 lakh in a financial year under Section 80C.However, ULIP policy issued on or after 1st Feb 2021, for which amount of premium payable for any of year during term of policy exceeds Rs. 2.5 Lakhs is not eligible for exemption under section 10(10D) and thus shall be taxable under section as capital gains under section 112A. Thus profit arising from amount received under such ULIP shall considered as ‘Capital Gain’ as per section 45 of Income tax act.

ULIP is a very effective tax saving tool because it comes under the EEE (Exempt, Exempt, Exempt) investment category. That means you get tax deductions on ULIP premiums, tax exemptions on yearly returns, and your Under Unit Linked Insurance Plan, you may be entitled to tax benefits under Section 80C and Section 10(10D), as per the Income Tax Act, 1961. These include, first of all, tax benefit on the premium paid towards a ULIP. This amount of premium is allowed as a deduction under Section 80C of the Income Tax Act Public Provident Fund (PPF)

If you have just started your career, PPF is also a tax-friendly retirement savings instrument. You can invest and save up to Rs 1.5 lakh in income tax deductions in a financial year with PPF. Also, the amount received on maturity is tax free.

However, currently PPF fetches only 7.1% per annum as the government has slashed interest rates. Though, you can make partial withdrawals, liquidity is a concern since it has a long lock-in period of 15 years.

Equity Linked Savings Scheme (ELSS)

ELSS’ are also called tax-saving mutual funds. These are high growth retirement funds that help you maximize your returns while saving taxes. Equity linked saving scheme investment is also eligible for income tax deductions up to Rs. 1.5 lakh in a financial year under section 80C. ELSS returns on maturity are also exempt from tax.

ELSS is a good long-term investment tool but returns are dependent on how the equity and debt market performs. Thus, it’s a little riskier than ULIPs and PPF.

Before you buy a retirement plan for tax benefits…

Obviously, when you buy a retirement plan or invest in a retirement fund, only tax savings shouldn’t be your sole motive. You want returns to build a substantial corpus and live a comfortable retirement life. Therefore, ask yourself these two questions before you buy:

1. Will my retirement plan provide returns that can beat inflation?

If your monthly expenses are Rs. 1 lakh in 2020, you will require Rs. 3.2 per month to maintain the same lifestyle in 2040, assuming that rate of inflation will stay at 6%. Thus, if your retirement fund cannot give you returns of at least 6% or more, your retirement corpus will be inadequate to meet your needs. Look for instruments that provide decent returns with moderate risks, higher liquidity and greater flexibility.

Here again, 4G ULIPs fits the bill completely. While ULIPs promise returns ranging between 9-15% per annum, you get the flexibility to switch funds, and it also comes with a low lock-in period. It carries minimum risks and you can reallocate funds as you draw close to retirement to maximize returns and protect your savings.

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2. Is it wise to put all the eggs in one basket?

No, it is never wise to put all your eggs in one basket. Therefore, don’t rely overly on one asset class for your retirement planning. Create a diversified portfolio of stocks, FDs, PPF, whole life insurance plans, ULIPs and ELSS to ensure that you never fall short of your retirement goals.