Some instruments help you perform the dual task of tax saving and retirement planning. Pick ones with the longest lock-in period
Everyone dreams of a comfortable retired life. However, fulfiling this dream is not that easy. Higher standards of living, loan repayments, responsibilities towards children (like education) and a host of other short-to medium-term obligations manage to distract one from saving for their retirement, critical for the much-wanted peaceful twilight years.
According to a recent survey by HSBC, (The future of retirement - Its time to prepare) approximately 58 per cent of the respondents in India were not sure of how their retirement income will look like. It was also observed that one of the reasons for the unpreparedness was the lack of understanding about long-term finances vis-a-vis the short-term. India is reported to have a higher savings ratio as compared to other countries. However, the survey revealed that the motive for saving is mostly for reasons other than retirement. Like saving for children’s education, which incidently accounted for 35 per cent of the savings, when retirement accounted for only 12 per cent.
Individuals may not be able to change their saving tendencies and goals attached overnight. However, things could be changed by slightly tweaking the attitude towards tax-saving investments. Every year, tax payers invest in tax-saving instruments to reduce their taxable income. To make the best use of these instruments, these savings can be targeted towards one’s retirement. For this, instead of choosing instruments with the least lock-in period, favour the higher-the-lock-in-the-better-it-is strategy.
Public Provident Fund
PPF continues to be one of the best tax-saving tools that can double up as a great retirement tool. While it enjoys sovereign guarantee, the triple tax benefits it provides at the investment, earning and maturity stage adds another feather to its cap. Although the maximum amount that can be invested in PPF annually has been recently raised to Rs 1 lakh from the existing Rs 70,000, the minimum amount continues to be Rs 500 per annum.
A PPF account is a must-have in one’s portfolio that can be easily carried on for a total period of 30 years (including the permissible extensions in blocks of five years after the initial 15-year period). A slow start to a PPF account by contributing Rs 10,000 annually and raising the contributions after every decade to Rs 50,000 and Rs 1 lakh each year can yield great results. Some projections show that the above strategy can help the individual accumulate close to Rs 28 lakh at the end of 25 years at a conservative rate of 7.5 per cent per annum. This amount, in addition, to the employee provident fund and gratuity amount received on retirement can be the perfect blend for the retirement corpus. Ideally, its the long lock-in and the tax benefits that make PPF the first choice for retirement savings.
National Savings Certificates
Yet another option from the small savings basket that fits well in this strategy are the NSCs. These are available for a five and ten-year maturity period. In its renewed form, this investment now offers 8.5 per cent returns for a five-year lock-in with the sovereign guarantee. Not very long ago, a very popular retirement strategy involved monthly investments and reinvestment in NSCs till around five years to retirement. This involved receiving the maturity amount every month during retirement, which would help the retiree with tension free cash flows to meet their standard of living. Of course, with higher income requirements now, this strategy may not fit well to the tee, however NSCs can still be looked at as an investment option by conservative investors.
Equity-Linked Savings Schemes
For investors, with a higher risk appetite, ELSS is a great retirement tool. Although in terms of lock-in period, this instrument ranks low. However, it would give provide the investor with the much-needed inflationary hedge to his retirement savings. With high volatility observed in equity markets over the last couple of years, ELSS has lost favour with investors. However, long-term investors should continue to look at ELSS from a retirement perspective by holding the funds even beyond the stipulated three-year lock-in period. Good ELSS funds, as on date, are yielding close to 15 - 18 per cent returns over a 10-year period.
With monthly investments possible, this option can help build the retirement corpus over long-term. Moreover, investors should keep in mind that ELSS does not entail regular investment commitment. Unlike pension plans or insurance policies, which will require the premiums to be paid for a minimum of five years, ELSS contributions can be one-time, wherever required. Therefore, for people who have an element of uncertainty as regards their savings in future can keep this option open.
Investors can also look at pension plans offered by mutual funds, as they offer similar advantages. One differentiating factor is that the pension plans have a lock-in till 58 and thus holds good for people who are serious about not touching their retirement corpus in the intermediate time.
Senior Citizen Savings Scheme
While the above options hold good for people planning for their retirement corpus, the SCSS is an option for the retired investor. Tax-benefit for investments in SCSS was introduced not very long back. Although the income earned from this scheme is taxable, the same carries sovereign guarantee and security.
Post retirement, investing for tax-saving is really troublesome as the retiree would not want to part away with liquidity just to save tax. SCSS fills this gap by providing the right blend of regular returns and tax benefits on investments. In its renewed form, the SCSS has a tenure of five years and is now offering returns at 9 per cent, of definite value during the post retirement scenario.
The HSBC survey claims that only about 13 per cent of the country’s workforce is covered under formal pension arrangements, leaving close to 284 million people without pension coverage. It is therefore imperative to be proactive about your retirement planning. And since tax-saving investments in India are often referred to as compulsory savings, use them for this goal. So, if you haven't started yet, this tax saving season may be as good as any.
The writer is a certified financial planner
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