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  • Why taxation constitutes an important part of retirement planning

    Published on March 11, 2020

    Tax payment can be an inevitable part of your financial planning. While many of you might pay the taxes regularly after you start earning, the rest of you might overlook the importance of tax payment after retiring. Ignoring the tax planning procedure after retiring can be one of your most common mistakes while planning for retirement.

    Taxes can get a little complex after retirement. Since the flow of your professional income can stop after retirement, you might be unable to pay the taxes. However, the right way to reduce your tax liability after retirement can be to opt for pension plan. If you wish to lead a comfortable retirement period, you should invest in a retirement policy at a young age. For instance, if you invest Rs. 5,000 every month at 35 years, your retirement savings can be approximately worth Rs. 75 Lakh.

    There are several retirement savings plan in the market that can fall under different tax brackets. As a retiree, you can choose between a unit-linked pension plan, Senior Citizens Savings Scheme (SCSS), bank deposits, and so forth. Ideally, you should invest in a retirement annuity or a tax-free investment option that can provide for your retirement as well as allow you to utilize the tax opportunities.

    • Retirement annuity

    Every financial year you can claim deductions on your retirement corpus. If you want to claim deductions, you can invest approximately up to 27.5% of your taxable income or your salary, whichever is higher. Under retirement annuity plans, you might not be liable to pay the applicable income tax, dividend tax, or capital tax. After you cross your retirement age, your tax liability drastically reduces due to a lower income level.

    • Tax-free investment

    There are specific investment tools such as a Unit Linked Insurance Plan (ULIP), Public Provident Fund (PPF), and so on that can fall under Section 80C and Section 10(10D) of the Income Tax Act, 1961 respectively.

    1. Section 80C

    Typically, you can claim a deduction up to Rs. 1,50,000 on your taxable income

    1. Section 10(10D)

    The death payout received on the maturity date from a ULIP plan can be tax-free in accordance with Section 10(10D).

    Note: If you opt for tax-free investments, you should claim deductions consistently every year. When you claim deductions, you can lower the impact of taxes on your retirement planning process, which in turn can increase the growth of your invested capital at a faster rate.

    Retirement can mark the beginning of the golden years of life. While many of you might aim to sit back and relax during your on-going golden years, the rest of you might plan to chase your unfulfilled goals such as traveling, starting a new venture, and so forth. During your retirement, you should have adequate funds and save more taxes to meet your post-retirement goals with ease. Therefore, investing in retirement policies that can offer tax benefits might seem like the right choice before nearing your retirement period. Since retirement can be your long-term goal, you should avail a retirement policy at an early phase of your life to make the most of the power of compounding. With compounding, you can double your invested capital as well as receive better returns.

    In a nutshell, taxation can be an essential part of your retirement. Although the tax rates reduce when the flow of your professional income, you are still liable to make the tax payments. Since you might find it appropriate to invest in a retirement policy to reduce your tax burden, you should keep a tab on your retirement savings to ensure that your taxes don’t deplete your wealth.