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What tax benefits are there on saving for retirement?

dateKnowledge Centre Team dateOctober 13, 2020 views122 Views 4 Minute Read

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 Oriental Bank of Commerce 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.

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.


Hi, I am Gajendra Kothari, a Chartered Financial Analyst and the CEO of a leading wealth management firm based out of Mumbai. Through the Tax video series by Canara HSBC Oriental Bank of Commerce Life Insurance Company we try to understand taxations by breaking some of the usual questions around tax in a simple easy to understand explanations.

Let’s take up this question today- Are there tax benefits available for our saving for our retirement?

  • The good news is the government of India has given a lot of options to us to plan for our second innings and what are these options let’s discuss each one of them.
  • Few of the most Retirement Products are Employees Provident fund, public Provident fund, NPS or known as new pension Scheme, ELSS and Life Insurance scheme or the pension plans offered by various insurance companies.
  • Let’s start with the first retirement products which known as employee provident fund or better known as EPF, if you are a salaried individual when you check your monthly salary slips you might crib about this line item which is titled EPF because this lowers your monthly pay outs.
  • Under EPF your contribution as an employee is up to 12% of your basic plus dearness allowance, your employee employer also contribute an equal amount, the contribution that is made by you is eligible for tax deductions U/s 80C up to rupees 1.5 lakh and the good news is the entire EPF corpus is tax free as time of your retirement, there is one caveat though you need to complete 5 years of your continuous service to be getting this amount tax free in your hands.
  • PPF or Public Provident Fund is one of the most liked and loved product in India. Reason is its Triple Benefits called EEE. Exempt – Exempt – Exempt !!!. It means when you investment your contribution is tax free, the Annual interest which you earn on your PPF is also Tax Free and finally the corpus at maturity is also tax exempted maturity the amount you receive is also tax free. And the best part of PPF is the returns are guaranteed be the government of India, the only things you know about PPF is that rate changes every year, it may not be fixed rates and you need to have an investment for 15 Years which can also be extended by a block of every 5 years
  • Another very popular product to plan for retirement is various insurance schemes offered by life insurance companies, this insurance scheme can be money back plans, traditional endowment plans, ULIP plans, pension plans, guaranteed return plans.
  • The beauty of these insurance policies is that the premium that you pay qualifies for tax rebate U/s 80C and the entire corpus is tax free at the time of maturity U/s 10(10D).
  • Well one of the product that has become very popular over the last few years is NPS or National pension scheme, in this product government gives us tax benefits under 3 different sections. The first one is very common you can claim 1.5 lakh rupees tax benefit every year U/s 80C. The second tax benefit that we get is a dedicated section which is 80CCC(1B) where up to rupees 50,000 if you invest in NPS you can claim tax exemptions. At the time of retirement you can take 60% of your NPS corpus in the form of lump sum that is tax free in your hands while the remaining 40% has to compulsorily invested into an annuity product of a life insurance company and the interest that you get from this annuity product is taxable in your hands and the third section that is not very familiar to most of us is 80CCD(2) of the income tax act one can claim tax benefits by investing in NPS, in this case if the employer’s contribution towards your NPS account is up to 10% of your basic salary plus DA this entire amount become tax exempt.
  • Well the next product is equity linked saving scheme or popularly known as tax saving mutual funds, these are diversified mutual fund wherein a contribution of up to 1.5 lakh is tax deductible U/s 80C, this product comes with a 3 years lock in period and presently the long term capital gain tax is 10% in excess of rupees 1 lakh.

Hope this video helps you in understanding the tax benefits of investing in various retirement products.

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