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Retirement Planning: Save your retirement kitty from taxes Naturally all of us want to retire comfortably & so we prepare retirement plan with best of our knowledge & ability. But often we forget most important aspect of retirement planning that is ‘tax’. It alone has the capacity to destroy your retirement nest & put your dreams into drainage. Note it, People falling in higher tax slab rate have to pay tax at a steep rate around 40% (30% + 3% of 30%), which is enough to mesh any plan.

Now, Question is, how can we ensure taxes don’t chips away our retirement kitty? In this article we are going to discuss some easy & practical tips to make your retirement plan truly tax-efficient. From taxation view of point there are two age segment of retired life, before 65 & after 65. This segmentation is important because tax treatment is completely different for these two age groups. Now let’s see how to deal with them. Strategy for early retiring age (below 65):-People below 65 are taxed as normal individuals. Basic exception limit is one lakh ten thousand, a saving of Rs. One lakh plus investment in medi-claim up to 10000 (for F.Y. 2007-08) .Total comes to 220,000.00. Yet it’s very unfair, people retire from work at 60 but not retire from paying taxes until 65. But a little proactive thinking can heal the situation.

Here are few tips:-

Commute as much as possible: U/s 10(13) anybody can commute up to 33.33% (in case gratuity receivable) or 50% (no gratuity) of Superannuation fund, which is tax-free. Pension plans of insurance companies also allow commuting up to 25% - 30%. Commuted amount will bring down monthly pension & subsequently taxable income also. Commuted pension can be used for pre-retirement preparation like home furnishing or can be invested in tax free instruments.

Receive benefits in installment: If it is possible to try to receive retirement benefits like gratuity, Leave encashment & other benefits in 4-5 annual installment. This will save you to pay taxes on higher rate & also give time to Implant money on proper place.

Reap the rich dividend: Dividend received from the Mutual fund is tax-free U/s 10(35). 10-15% of your retirement portfolio should be invested in mutual fund to beat inflation &. You can invest in dividend plan of mutual fund scheme to increase your monthly income. Although Flip side is that there is no guarantee for duration & amount of dividend. Still dividends are effective way to receive tax free income.

Recycle the tax savings: As discussed above a total income of 110,000.00 is basic exemption limit. If income exceeds the limit then either you have to pay tax on that or invest a similar amount in tax saving instruments. If your expenses is less then 110,000.00 then it’s, OK! But, what if your annual expenses is more than basic exemption. Then you have to pay taxes on your expenses.

Here is an idea to recycle over your savings & use the benefits again & again. For instances invest. 30,000.00 per.anum into tax saver mutual fund (dividend plan) for three successive years. As we know Lock in Period for Mutual fund is 3 years, So on fourth year you can redeem investment of first year, pocket the profit & invest the same to claim deduction in next year. This way you need not arrange money every year while can enjoy deduction every year.

Small Difference: Big Effect Strategy for senior citizen (above 65):-

After crossing 65 an individual acquire the status of sr. citizen. Taxman allows a respectable basic exemption limit of 1, 95,000.00, tax saving investment 100,000.00 plus 15,000.00 for medi-claim. That means not to worry if your income is up to 3, 10,000.00, but it worth to note if your income exceeds that limit. Then, you have to pay tax @ 20%. Therefore in this segment your focus should be on tax free income. Along with dividend income & recycling tax saving investments following steps can be useful.

Cap your taxable income: Invest in RBI Bonds (taxable), Bank FD, Monthly income scheme & other taxable income until their proceed does not cross above-mentioned limit. Further income should be invested in tax free income. Buy a medi-claim Policy of 15,000 per year premium, it will take care of rising cost of health & medicals plus the deduction from taxable income.

Avoid long-term lock-in: - Don’t invest in tax saving which have long lock-in PF, NSC, etc. Due to long term lock-in period these are not suitable for recycling. Even not good for portfolio-liquidity which is a must for a Retirement Portfolio. Success of any retirement plan depends on two aspects; How well is it invested? &, how well is it protected?

Mostly retirement plans are well built on investment but fail to protect funds from taxes, while it is an important issue which should be considered before arriving at final figure. Because non consideration can create a wide gap between what you want & want you get.


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