Earn above Rs 12 lakh? Here's how you can make your retirement plan tax-efficient
Saving for retirement used to be easy. But in the past few years, there have been several amendments in tax rules for retirement products. Many instruments are now in the tax net. At the same time, individuals earning up to Rs 12 lakh a year will pay no tax under the new regime, which is a massive relief for millions of taxpayers.
If your income is more than Rs 12 lakh a year, here's how you can make your nest egg tax efficient.
Stocks and equity funds:
Long-term capital gains from stocks and equity-oriented funds are now taxed at 12.5%. But there is a Rs 1.25 lakh tax-free threshold that can help small investors avoid the tax. They should harvest long-term gains of up to Rs 1.25 lakh every year by booking profits, and then buying back the same stocks or mutual funds.
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Ulips:
Maturity proceeds of Ulips are taxable if the combined premium of policies bought after 1 February 2021 exceeds Rs.2.5 lakh.
To avoid the tax, restrict investments in Ulips to Rs.2.5 lakh in a year. If you need to invest more for retirement, use mutual funds or the NPS to fatten your nest egg. NPS investments can also help you save more tax.
Traditional insurance policies:
The maturity proceeds of life insurance plans have also been made taxable if the total premium of policies bought after 31 March 2023 is over Rs 5 lakh. Don't put more than Rs 5 lakh in traditional insurance plans.
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Use debt funds and the NPS if you need to invest more.
Debt funds:
There is now no distinction between long-term and short-term gains from debt funds. These funds are also no longer eligible for the indexation benefit. All gains will be added to income and taxed at slab rates. Even so, debt funds help defer tax because the gains are taxed only when you redeem. Keep investing in debt funds and redeem after retirement when your income and tax liability will be lower.
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Provident Fund:
The Provident Fund has always been seen as a tax-free haven. But three years ago, the interest earned on contributions to the Employees' Provident Fund beyond Rs 2.5 lakh in a year were made taxable. To get past this, restrict contributions to Rs 2.5 lakh a year. Investors who want to put in more should open a PPF account, if they don't already have one. They can also go for debt funds to defer tax.
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