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Projecting your retirement wealth in post tax terms

When you plan for retirement one of the first questions you need to ask is how much tax do you pay in retirement? As part of your retirement plan returns and risk are just one side of the story. The other angle is taxes. You need to ensure that your post retirement flows are as tax efficient as possible. Let us first understand how is retirement income taxed in India? The Income Tax Act does offer a higher tax exemption limit for senior citizens but there is nothing like a concessional rate of tax for those who are retired. Hence it behoves upon you to ensure that your retirement plan is largely tax efficient. Let us understand with a Retirement calculator..

DetailsEquity FundsDebt FundsPPFBank FDsTax Free BondsTax on corpusTax free after 1 year holdingIndexed LTCG at 20%Full corpus tax-freeNo tax on corpusNo tax on corpusTax on income flowDividends are tax freeDividends tax free post DDTInterest fully tax-freeInterest fully taxableInterest fully tax-freeRisk profile of productHigh RiskMedium RiskLow RiskLow RiskMedium RiskReturn profileHigh ReturnsAbove average ReturnsLow ReturnsLow ReturnsAttractive post tax returns

The Retirement income tax calculator captures the comparative merits and demerits of various asset classes that people normally use to plan their retirement corpus. From a tax perspective, let us understand how each of these products fits into your retirement plan.. Estimate your retirement benefits with gratuity calculator. Calculate your gratuity amount based on your salary, years of service, & interest rate.

Equity Funds:
Equity funds as a retirement corpus planning tool is extremely powerful. One can argue that equity funds can be risky as an asset class. But, when we are talking about retirement planning we are talking about a time perspective of more than 15-20 years at the bare minimum. If you look at the experience of diversified equity funds, then it is only in exceptional cases that some equity fund may have underperformed over such a long time frame. In fact, most equity funds that are diversified have managed to outperform the indices by a margin over longer periods of time.
Equity funds are also extremely tax efficient. Ideally opt for a growth plan in an equity fund which you are earmarking for your retirement. Any capital gains beyond 1 year is anyways tax-free in the hands of the investor hence you can be assured of the best post tax yield when it comes to equity funds.

Debt Funds and Balanced Funds:
Debt funds have a slightly different return and risk profile and even the tax profile is slightly unfavourable. Debt funds offer you stability of returns, limited volatility and regular returns. You can structure your debt fund as a dividend plan or as a growth plan. In case of a dividend plan, the dividends are tax-free in your hands. However, the dividend distribution tax (DDT) on debt funds at 28.33% can add up to quite a large forfeiture of dividends. A better way for planning your retirement will be to opt for growth plans of debt funds. The capital appreciation will be treated as LTCG and will be taxed at 20% of the indexed gains subject to a ceiling of 10% of returns.
A smarter way is to include a greater portion of balanced funds into your portfolio. They combine the wealth creation of equity with the stability of debt funds. However, for tax purposes they are classified as equity funds if the equity exposure is more than 65% and thus the corpus will be entirely tax free in the hands of the investor on retirement.

Pure debt products for retirement planning..
Some of the popular products for retirement planning from the debt side are PPF, Long term bank FDs and tax-free bonds among others. Interest on PPF is tax free and the final corpus is exempt when redeemed on maturity. However, it has a maturity of 15 years although the withdrawal is permitted after 7 years and loans can be availed after 3 years. However, there is the risk of EET putting a tax in the year of redemption. Bank FDs are low return products and the interest is entirely taxable. It is not a product suitable for wealth creation. Tax free bonds are suitable for retirement planning as they offer tax free interest and the redemption is also tax free. However, the returns are extremely low and the lock-in period is quite long.

The bottom-line when it comes to post tax returns on retirement..
The bottom-line is that when it comes to deciding how much tax do you pay in retirement, equity definitely should constitute the substantial portion? Of course, post retirement this corpus can be invested in products like debt funds and MIPs to give you tax-efficient returns via the mutual fund route. .

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