The key to a happy post-retirement life lies in building a corpus as soon as one starts earning.

There are various investment options that ensure tax savings before retirement and a regular source of income after it.

Besides retirement benefits through Provident Fund and gratuity and pension through the superannuation fund, some of the traditional investment avenues are Public Provident fund (PPF), deposits in bank and post office, bonds, debentures, life insurance policies, shares, gold and immovable property.

Investments in PPF, Employees’ Provident Fund and LIC premium are eligible for deduction under Section 80C of the Income Tax Act, subject to an overall limit of R1.5 lakh every year. The amount received on retirement, along with interest from PF and PPF, is tax-free. Even the amount received on maturity from LIC is exempt from tax, subject to conditions. Interest on deposits, bonds and debentures is,
however, taxable.

Interest on a savings bank account up to R10,000 is exempt from tax under Section 80TTA. Gratuity received on retirement is tax-free up to R10 lakh and the amount received from the superannuation fund, in lieu of commutation of pension on retirement, is exempt from tax though pension received is taxable.

Dividend received on investment in shares is exempt in the hands of shareholder as the company has to pay dividend distribution tax (DDT).

Some of the modern avenues for investments are mutual funds, insurance products like unit-linked insurance policy (Ulip) and pension policies, National Pension Scheme (NPS) and reverse mortgage scheme.

Mutual funds offer an easy investment option through monthly/quarterly instalments. Dividend from mutual fund with investment in equity is tax-free since mutual fund is required to pay tax. Ulips give the benefit of life insurance and investment in equity and this investment is tax deductible under Section 80C of the Act. However, maturity proceeds from NPS are taxable and, on completing 60 years of age, compulsory annuity of 40% is required to be purchased.

Every individual endeavors to own a house after retirement. If an individual invests in a house property for self use through loan, interest paid up to R2 lakh is tax deductible. Also, capital repayment is deductible under Section 80C. After retirement, the same property can become a source of income through the reverse-mortgage scheme where the lender pays to the owner of the house against its mortgage.

The loan is not required to be repaid during the lifetime, though an option is available for prepayment. The loan, along with accumulated interest, is repaid after death through the sale of the property. The mortgage does not amount to transfer; hence, it doesn’t attract capital gains tax. Similarly, the amount received from the lender is tax-free. A good health insurance policy is a must after retirement and one should take it at a young age and renew it every year.

After retirement, investments must be made in avenues that give a regular source of income, such as monthly deposit schemes of banks and post office or mutual funds, etc. There are many schemes specifically designed for senior citizens that give interest income at rates higher than the normal.

Even the Income Tax Act, 1961, provides higher basic exemption limit for senior citizens and very senior citizens to help them save money as there are not many sources of income for them. To keep it short, fiscal discipline is key for a good life after retirement.

The avenues

  • Investments in PPF, EPF and LIC premiums are eligible for deduction under Section 80C of the I-T Act, subject to the overall limit of R1.5 lakh every year
  • Dividend received on investment in shares is exempt in the hands of shareholder
  • Dividend from mutual funds with investment in equity is tax-free

By Yogesh Shah
The author is partner, Deloitte Haskins & Sells LLP. With inputs from Aparna Parelkar, manager,  Deloitte Haskins & Sells LLP