Here are some of the attractive investment products that can prove to be helpful when you’re planning your retirement fund.
A little deviation in return on investment can significantly impact a retirement corpus. So, selecting the right investment instruments is crucial when you work towards building an adequate retirement fund. Tax efficiency, return prospects, stability, liquidity, and the level of risk are some of the key factors that play an important role in selecting the right investment products to meet your retirement goal. It takes many years of patience, a highly disciplined and focussed approach, and timely adjustments when required to achieve this.
So, here are some of the attractive investment products that can prove to be helpful when you’re planning your retirement fund.
Unit Linked Investment Plans (ULIPs)
ULIPs are financial instruments with combined features of insurance and investment. So, when you invest in a ULIP, you not just get a return but a life cover too. ULIPs also allow tax deduction benefit up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Earlier, ULIP proceeds were tax-free subject to premium not exceeding 10% of the sum assured. However, in Budget 2021, Finance Minister Nirmala Sitharaman has proposed to levy a tax on proceeds of such ULIP policies for which the annual premium amount exceeds Rs 2.5 lakh. The excess premium above Rs 2.5 lakh will be liable for the same tax treatment as equity mutual funds when the long-term capital gains exceed Rs 1 lakh in a financial year. The LTCG over and above Rs 1 lakh on equity mutual funds is taxed at a 10% rate.
As such, if you were relying mainly on ULIPs for saving taxes and for your retirement planning, you may need to adjust your plan now. With ULIPs losing the tax advantage to some extent, you may now explore other investment products that could offer a better return. However, if your annual ULIP premiums are less than Rs 2.5 lakh, this proposal shouldn’t bother you.
National Pension System (NPS)
When planning for your retirement, it may not be a good idea to rely entirely on one asset class like only equity or debt. However, the NPS offers you the choice to invest in a mix of equity, corporate debt, and government debt – as such, a high degree of flexibility in terms of the choice of asset classes. It also offers a tax deduction benefit of up to Rs 1.5 lakh under Section 80C and an additional tax deduction benefit of Rs 50,000 under Section 80CCD of the I-T Act. Now, an NPS investor is allowed to withdraw 60% of the corpus tax-free on reaching superannuation age. The remaining 40% has to be compulsorily used to purchase an annuity plan. The annuity income is later taxed at a slab rate applicable to the investor.
As such, in terms of investment flexibility and return prospect, NPS offers an excellent choice. However, it falls behind in terms of tax on annuity income after retirement and lack of liquidity.
Equity Mutual Funds SIP
When it comes to long-term investments, especially retirement planning, equity mutual funds could offer a high return potential albeit with medium to high risk. You can mitigate the investment risk to some extent and garner better rupee-cost-averaging returns by investing through the SIP mode. The LTCG above Rs 1 lakh in a financial year on equity mutual funds is taxed at a 10% rate. If you’re yet to exhaust your 80C deduction benefits, you can also consider investing in tax-saving equity funds called equity-linked savings schemes (ELSS) to get higher returns if doing so is in line with your risk tolerance. Depending on your age, risk tolerance, and return expectations, you may invest in equity mutual funds. As you get closer to retirement, you may reduce equity mutual funds’ exposure to reduce the risk.
Equity mutual funds offer attractive returns, high liquidity, and an excellent level of flexibility to the investor, making it a great choice for retirement planning. However, do not ignore the associated risks while investing in mutual funds.
Employees’ Provident Fund (EPF) and Voluntary Provident Fund (VPF)
Investment safety and relatively higher returns than other debt instruments make EPF a preferred investment vehicle among salaried investors for retirement planning. In fact, EPF is currently offering 8.5% p.a. returns when Public Provident Fund (PPF) is giving 7.9% p.a. while most public and private banks are offering 4%-6.5% p.a. on regular fixed deposits amounting to less than Rs 1 crore. Employees’ contribution to EPF allows tax deduction under Section 80C. Employees can voluntarily invest in retirement funds through the VPF mechanism that allows the same interest as EPF.
However, before Budget 2021, the interest on EPF and VPF was exempt from tax. In Budget 2021, the government has proposed to levy tax on the interest earned if the annual PF contribution of employees exceeds Rs 2.5 lakh from the next financial year. This new announcement could make EPF slightly less popular among high-value investors who contribute more than, say, Rs 20,000 in a month through VPF. However, the new Budget proposal will make no difference to a majority of EPF investors whose annual contributions are less than Rs 2.5 lakh.
For retirement planning, you should invest in a balanced portfolio that offers you a good yet stable return while allowing flexibility and high tax efficiency. Investing in a mix of NPS, EPF, ULIP, equity funds, debt schemes, FDs, gold and real estate are likely to be very helpful. You should also keep track of policy changes while investing for retirement. Lastly, don’t hesitate in reaching out to a certified investment planner if you get stuck at any point.
(The writer is CEO, BankBazaar.com)