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How to Plan for Tax-Free Retirement Income?

With no regular source of income, you’d rely on your investments to manage the basic post-retirement expenses. But taxes can consume a good chunk of your retirement income. Taxes are already a burden throughout our working lives, and the weight of this burden only rises after retirement as you don’t work anymore. 

However, there are effective ways to earn tax-free retirement income or at least significantly reduce the tax burden. Take a look at these four tips to protect your retirement income from tax erosion:

  1. Understand Post-Retirement Tax Benefits

The tax implications change significantly once a taxpayer attains the age of 60 years. Knowing these changes is the first step to reducing the tax liabilities. For instance, the basic tax exemption limit for seniors is up to Rs. 3 lakhs in a financial year. The same for super seniors (above 80 years) is up to Rs. 5 lakhs. 

Apart from the higher basic exemption, seniors are also offered a higher deduction of up to Rs. 50,000 on health insurance premiums under Section 80D. Similarly, under Section 80TTB, seniors can earn tax-free interest of up to Rs. 50,000 in a financial year. Senior citizens also get a deduction limit of up to Rs. 1 lakh for treating critical/specified illnesses under Section 80DDB. 

  1. Consider ELSS for Equity Exposure

While it is generally recommended that seniors should prefer safer investment options, debt assets often fail to deliver positive inflation-adjusted returns consistently. Limited equity exposure can help the post-retirement investment portfolio earn higher returns. As compared to direct equity investment, the ELSS mutual fund could be a smarter option. 

Equity Linked Savings Scheme (ELSS) is a mutual fund scheme eligible for a tax deduction of up to Rs. 1.5 lakhs under Section 80C. Capital gains of up to Rs.1 lakh in a financial year are tax-free, and long-term capital gains tax @10% is applicable on higher returns. 

  1. Invest in Tax-Saving FD

Fixed Deposits (FDs) are already very popular among seniors for the guaranteed returns they offer. But as compared to regular FD, seniors should consider 5-year tax-saving FD to save taxes. Investments made in 5-year FD are eligible for deduction under Section 80C. 

While tax is applicable if the interest income is more than Rs. 50,000 in a financial year, the savings under 80C generally set off the applicable taxes. It is also worth noting that senior citizens are offered 0.25%-0.5% higher interest rates on FDs by most financial institutions. 

  1. Make Tax-Free Bonds Part of Retirement Corpus

Seniors who are in the higher tax bracket and searching for a tax-efficient long-term investment option can also add tax-free bonds to their retirement plan. The bonds are issued by government-backed entities and generate fixed interest. It is also possible to sell them on stock exchanges, but liquidity can be an issue. 

Tax-free bonds are generally recommended to senior investors who want to invest for at least 10-15 years and don’t need the funds immediately. 

Earning Tax-Free Post-Retirement Income

Thanks to favourable tax treatment and the availability of several tax-efficient investment options, it is possible for seniors to earn tax-free income after retirement. As the tax liability will fall, you’d be left with more money to enjoy the things you like and live the retirement of your dreams. 

Seniors can consult a professional tax advisor or financial planner to take maximum advantage of these tax provisions and investment options. 

 

 

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