If you want to plan your taxes, you may consider planning your retirement.
Ask a salaried individual what haunts him the most, in most cases the reply would be – loss of job. One worries about job loss not because he loves working but because job loss entails loss of cash inflow. If you are one of them, then you should be even more worried about your retirement as a retired person does not get salary. To overcome your worries, you should be planning for your retirement. Why you must be planning it now and here you can read about the factors you should keep a track of.
The next big thing most salaried individuals are worried about is the tax bill. If you want to plan your taxes, you may consider planning your retirement. Here is how you can cut your tax outgo and plan your retirement:
EPF & PPF
These traditional investments are still relevant if you believe in slow but steady wealth creation over long period of time. Recently the government has hiked the rate of interest payable on public provident fund by 40 basis points to 8%. “PPF is an EEE investment vehicle wherein the contribution enjoys tax benefit and so does the interest accrued on contribution. The withdrawals too are tax exempt,” says Balwant Jain, Mumbai based tax and investment expert. Under section 80C of Income Tax Act you can claim deduction up to Rs 1.5 lakh in a financial year. Your contributions to EPF and PPF are eligible investments. “These two vehicles are important from asset allocation point of view. They offer exposure to debt and visibility of returns from your portfolio,” says Tarun Birani, founder and director of TBNG Capital Advisors.
Tax saving funds (ELSS)
Another contender from Section 80C stable is equity linked saving (ELSS) schemes, popularly referred to as tax saving schemes of mutual funds. “For financial goals such as retirement that are far away, you should have high allocation to equities,” points out Balwant Jain. Over past five years, ELSS as a category has given 12% rate of returns. These schemes can create value for investors over long term. “Though tax saving funds do have a lock in period of three years, there is no need to sell them after three years. You can hold on to your investments and benefit from compounding,” says Tarun Birani.
NPSIf you are looking for regular income in golden years, you should be considering an investment in national pension scheme. It gives you an opportunity to save tax on contribution of Rs 50000 to NPS per year in addition to that allowed under Section 80C on various other instruments. “40% of the money accumulated in NPS account can be withdrawn at the time of superannuation and the remaining can be used to buy annuity. That effectively transfers the tax liability to a distant future when your income is low,” points out Balwant Jain.
“Off late NPS has started offering high allocation to equities. That makes it more attractive from wealth creation point of view,” says Tarun Birani. Higher equity allocation in earlier years make it better positioned to accumulate wealth in long term.
Investing in aggressive hybrid mutual funds
Aggressive hybrid equity funds are also good candidates to save for your retirement. These funds typically invest minimum 65% of money in stocks. The investments in stocks are capped at 75%. The rest of the money is invested in bonds. The fund manager is expected to stick to this asset allocation. It leads to rebalancing without attracting any tax-liability. If one keep rebalancing the asset allocation between bond funds and equity fund in 25:75 proportion, then he will end up paying short term capital gains – at marginal rate of tax on bond funds and at 15% rate of tax on equity fund. This is saved when one goes through aggressive hybrid fund. Aggressive hybrid funds have delivered 12.1% average returns over past five years.
However, you should be prepared to stick to your investments in volatile times. These funds are like any other equity fund and can offer losses in short term. It is better to take systematic investment plan - SIP way while investing.
ULIPThough most financial planners prefer to keep insurance and investments separate, there are some investors who would like to club the two and further want to enjoy investments. Premium paid towards ULIP is eligible for tax deduction under section 80C of Income Tax Act, up to Rs 1.5 lakh, along with other eligible investments.Marrying tax planning with retirement planning can ensure that you invest more and take home better returns after tax. The slow but steady approach also ensures less pressure on the investor.