Link your tax planning to your retirement planning goal

Ronak MorjariaApnaPaisa.com

Season for tax savings has already started; you will have to submit investment declarations for the current financial year to your employer to save tax. You must be panicking for investing to save your taxes. Why should you wait till end for tax planning?

One way to have disciplined tax planning is to link your tax savings investments to your retirement goal. The idea for linking tax planning to your retirement goal is important since all the tax savings instruments have a lock-in period of 3 to 15 years. Firstly you should calculate the required inflation adjusted retirement corpus depending on your current household and heath insurance expenses. Once you have calculated your required retirement corpus, you should calculate the required monthly investment to accumulate the desired corpus and then start investing which should depend on your risk profile and time remaining for retirement.

Looking at the long-term nature of investment that can be linked to your retirement, here are some of the tax savings instruments that you can choose:

PPFPublic Provident Fund is one of the best debt investment instruments with tax benefits and attractive rate of interest. It is a long-term investment, since you have to hold it for a minimum period of 15 years. Partial withdrawals and loans are allowed in PPF, though only upto certain percentages of your PPF balance in a particular year. Since, the liquidity is poor, you cannot allocate it for short-term goals, and thus it is suitable to allocate it for your retirement. The Government declares the rate of interest of PPF every year. Current rate of interest for financial year 2013-14 is 8.70% p.a.

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Ronak Morjaria

Equity Research Associate|Way2Wealth Brokers

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EPFEmployee Provident Fund is one of the most disciplined ways of savings, since the contribution to EPF is made directly from your gross salary. You as well as your employer makes equal contributions in the EPF account. Just like PPF, EPF also has poor liquidity since there are some restrictions on withdrawal from EPF account. Your EPF account is active till you are working and regular contributions are made. So, it is advisable that you don’t touch the money in EPF and hold it till retirement. It serves as a cushion for retirement along with your other savings for retirement. The Government declares the rate of interest of EPF every year. Current rate of interest for financial year 2013-14 is 8.75% p.a.

ELSS FundsEquity Linked Savings Scheme (ELSS) funds of Mutual Funds have the shortest lock-in period of 3 years. ELSS funds have major exposure to equity. Though the lock-in period is only for 3 years, you are advised to invest in ELSS funds only if your investment time horizon is at least 10 years. It is one of the best instruments for taking equity exposure with tax benefits. You should always invest in ELSS funds via SIP, just like you invest in equity-diversified funds. Since ELSS funds are market linked, they are highly risky with higher returns and have the capability to beat inflation. Thus, it can help you built a healthy retirement corpus. You should review your portfolio periodically, though you will not to able to switch or redeem before the lock-in period, but you can at least stop your existing SIPs of non-performing funds and start fresh SIPs in performing funds.

NPSIn National Pension System (NPS), you can claim tax deduction only under Tier I account. You have two options under NPS, ‘Active’ and ‘Auto’ option. Under Active option, you have the choice to select investment proportion in Equity, Fixed income instruments other than govt. securities and Central Govt. and State Govt. Bonds. Under Auto option, there is fixed schedule of investment allocation as per your age group. You need to compulsorily deposit a minimum Rs.500 per contribution and Rs.6, 000 per financial year; and minimum four contributions per year. Thus, investing in NPS helps you invest regularly. Only issue with NPS is you can withdraw only upto 20% (before age 60) and 60% (after age 60) of the accumulated funds in your NPS account, the balance amount should be compulsorily utilized to buy immediate annuity. The pension / annuity receivable is taxable as per your tax slab rate. Thus, NPS is not recommended from tax perspective.

You should invest in a mix of these instruments depending on your investment time horizon and your risk appetite. Younger you are higher is your ability to take risk, and thus higher should be your investment in ELSS funds. You can avail tax deduction upto Rs.1 lakh under section 80C. But retirement planning is not restricted to Rs.1 lakh that you invest to save tax under section 80C; you should invest the additional required amount required to accumulate the corpus in other investment instruments. Allocating tax savings investment to your retirement goal helps you maintain discipline for investing under 80C. With this you can design your financial life with two-in-one benefits Tax Planning with Retirement Planning!!!

Apnapaisa is Online market place for loans and investments. Author can be reached at www.apnapaisa.com.