Many of the traditional pension plans have been replaced with financial instruments that not only provide tax benefits but also give tax-free returns. This is why millennials have deviated towards options that can give lucrative returns to suffice for retirement without tax liability. Some of these traditional plans include five-year time deposits with post offices and banks, Senior Citizens’ Savings Scheme (SCSS), National Savings Certificate (NSC), etc. where the interest earned is liable for taxes. But the new tax regime doesn’t give investors the benefit of claiming tax deductions for various financial instruments. To do so, you would have to opt for the earlier tax system to enjoy the perks of tax-free income. So, let’s look at some retirement investment plans in India that will give beneficial returns at retirement age.
4 Investment Options That Give Tax-Free Income
Here are four tax-saving financial instruments that can act as a pension plan by providing tax-free income in the future:
1. Public Provident Fund
Public Provident Fund or PPF is a financial tool initiated by the Government of India and has a lock-in period of 15 years. The interest rates are lucrative, enabling you to enjoy the power of compounding over a long period of time. The contributions made towards PPF can be claimed under Section 80C of the Income Tax Act, 1961 with a maximum cap of INR 1,50,000. Also, the corpus received on maturity is tax-free. You can start investing in PPF by getting an account in the designated banks or post offices. This investment tool has a low risk, thus, suiting investors who do not want to take up high-risk options.
2. Equity-Linked Savings Scheme
Equity-Linked Savings Scheme or ELSS is a mutual fund scheme which majorly invests in equity funds. It has a lock-in period of 3 years which can be continued if the returns are beneficial. Long Term Capital Gains of up to INR 1 lakh is exempt from taxes and the dividends are tax-free. The contributions made towards ELSS can be claimed under Section 80C with a maximum cap of INR 1,50,000. This financial instrument comes with high to moderate risk as the returns are greatly affected by market volatility.
3. Life Insurance Plans
a. Traditional Policies
Traditional life insurance plans with a savings component provide you with a life cover and fulfil long-term savings plan. Policies like a whole-life plan, money-back policy, endowment plan, etc. give maturity benefit on expiry of the plan. The contributions made towards securing an insurance plan can be claimed under Section 80C. In case of death of the policyholder, the death benefit is deemed as tax-free. Both the death and maturity benefit can be claimed under Section 10(10D) for exemption.
b. Unit-Linked Insurance Plan (ULIP)
ULIPs are insurance policies with an investment component. With this, you can invest in equity or debt funds with a lock-in period of 5 years. You are allowed a certain number of fund switches depending on your insurance company. Thus, with ULIPs, you get a life cover as well as an opportunity for wealth creation. The contributions made towards the plan are eligible for tax deductions under Section 80C. The corpus received on maturity is also deemed as tax-free and can be claimed under Sector 10(10D).
4. Employees’ Provident Fund
Employees’ Provident Fund or EPF is another opportunity for you to save on taxes as a salaried individual. A certain percentage of your salary gets added to the EPF account along with the employer’s share. This amount can be claimed under Section 80C of the Income Tax Act, 1961 but not the amount contributed by the employer. Also, the corpus is exempt for taxes if the withdrawal is made after 5 years.
You can now begin investing in these tax-savings tools and get a tax-free retirement income. You can also take help of a retirement calculator to estimate the amount required after retirement. This will aid you in understanding how much more you need to invest to be self-sufficient at 60.
