How to Protect Your Retirement Funds from Taxes & Inflation

Retirement does not mark the end of your financial and investment planning, but a new phase of it. As you survey your finances, you might be happy with your Provident Fund, and your pension is probably on the horizon – things look rosy. But you should beware of taxes and inflation. Pooling in your savings is only half the job, you must keep earning returns from them that are higher than the inflation rate, and keep your tax liabilities to a minimum.
Sep 2022
4 mins read

As an investor, you may not be able to control the structure of tax or the rates of inflation. However, with sound investment planning, you should be able to ensure the returns from your investments stay ahead of the inflation rate. Ultimately, your post-retirement personal finance situation will depend on how effective you have been in planning your financial goals to protect your savings from tax and inflation.

Here are the 3 steps to prepare for growth-focused investments to counter inflation and tax:

● Identify your new sources of income – The Income Tax Act 1961 labels individuals aged above 60 and above 80 as ‘seniors’ and ‘super seniors’ respectively. These segments of people can pursue specific income sources such as pension, salary from a post-retirement career, rental income from a property, and investments and capital gains earned from asset sales.

● Analyse the tax caps on different sources of income – The Income Tax Act defines the tax exemptions available to seniors and super seniors. A senior citizen in India is entitled to a standard exemption of Rs. 3 lakh. For a super senior citizen, the exemption stands at Rs. 5 lakh1. This means they have to pay tax only if their income exceeds these thresholds subject to certain conditions.

● Focus your investments towards retirement planning – Once you’re clear on the various income heads and the tax applicable for all of them, it’ll be easier for you to identify what investments to make. How you plan your investments will decide how efficiently you’ll be able to manage your unexpected expenses and save more.

These are the 5 investment avenues to secure your retirement savings from tax and inflation:

● Equity mutual funds – The long-term capital gains from investing in stocks and equity mutual funds are tax-free upto Rs. 1 lakh p.a., when you redeem them after a year. A Capital Asset that is held for more than 36 months or 24 months or 12 months, as the case may be, immediately preceding the date of transfer is treated as long-term capital asset. Equity Mutual Funds may be the ideal options to start your investment planning journey as per your risk appetite. Equity exposure is important since it helps generate funds that can withstand the rate of inflation. However, a word of caution here – avoid over-exposure to stocks, since it may be risky for some in the retirement phase.

● Balanced funds – Also known as equity-oriented hybrid funds, these may be a less risky option compared to stocks or equity mutual funds. This is because they can allocate upto 35%of their investments to assets in government and corporate bonds. The tax structure remains the same as stock and equity mutual funds long-term capital gains are tax-free upto Rs.1 lakh p.a.. These may be ideal for generating wealth in the long-term.

● Public Provident Fund (PPF) – This is one of the rare investment options that are tax-free both at the investment and maturity stages, as per Section 80 (C) and 10 (10D) of the Income Tax Act3. The investment limit is INR 1.5 lakh per annum to avail tax benefit and the lock-in period is 15 years. It’s possible to extend your account thrice after the termination of the 15th year, in series of 5 years. PPF offer at present high single digit rate of interest. One small tip to make the best use of your PPF account after retirement – re-invest a part of the lump sum corpus by extending the account every 5 years, instead of opening a fresh account altogether.

● Term Deposit (Tax Benefit) – Another tax-saving investment option is the term deposit that offers Tax benefits under Sec. 80C of Income Tax Act.. These are long-term fixed income options that have a lock-in period of minimum 5 years. The interest from this is taxable.

● Post Office Monthly Income Plans (MIPs) – Your money is safe until maturity as this is a government-backed scheme. The lock-in period for Post Office MIS is 5 years. You can withdraw the invested amount on maturity or reinvest it. You earn income in the form of interest every month. No TDS is applicable. You can invest up to Rs.4.5 lakh individually or Rs. 9 lakh jointly. However there are no tax benefits. You may also consider conservative hybrid mutual funds as a worthwhile option. These funds invest in both debt and equity instruments. Your financial goal planning here should be to generate a steady income to manage expenses through regular withdrawals as per needs.

Retired life is a time when tax savings become as important as your investment income. Good investment planning has to take into account the various tax liabilities too. Striking a balance between income generation and tax saving will help you make the most of your retirement funds.


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