Status quo on retirement planning

Retirement planning will not change a great deal after the latest version of the Direct Taxes Code (DTC). The good news is that the exempt-exempt-exempt (EEE) tax regime has been retained on instruments like Employees’ Provident Fund (EPF) and Public Provident Fund (PPF).

Besides, there will be no long-term tax if you wish to save through equity mutual funds. However, remember that equity mutual funds will attract a dividend distribution tax (DDT) of five per cent. While pure term policies are out of the tax regime, long-term savings though unit-linked insurance plans (Ulips) can be more expensive.

In the present tax regime, for a 20-year policy, if any of the premiums exceed 20 per cent of the sum assured, there is a tax incidence on the final amount. Since few policies qualified under such a regime, it was assumed to be EEE. In case of DTC, for a 20-year policy, if any of the premiums exceeds the sum assured by five per cent, there will be a tax on maturity. Since many policies may qualify under this, financial experts feel these policies will qualify for taxation.

In addition, there will be DDT on schemes that have 65 per cent of more holdings in equities. Under these premises, retirement planning for different age groups needs to be done to ensure that the final corpus is tax-efficient.

Just starting
Start investing a minimum of 5-10 per cent of your income and increase your investments at least 10 per cent a year.

At this stage, you have almost 30 years to go before retiring. So, accumulate by way of small contributions to equities. This is because there is a compulsory debt investment already happening — Employees’ Provident Fund. “You can take risk with equities only till you have an income flow and, during these early years, there is an assurance of it,” says Kartik Jhaveri, director, Transcend India.

If your income is small and any windfall through dividends helps to meet certain crucial expenses, a five per cent tax should not deter you. You can even be a little more aggressive and invest in mid- or small-cap funds that may give better returns in a rising market and offset the tax blow.

“While the risk is higher in small- and mid-cap funds, young investors can look at these because their risk-taking ability is much more. At least, it is better than buying stocks on tips,” says a financial planner. Get adequate insurance through term cover.

On the way to retirement
If you are 15-20 years away from retirement and starting now, aggression is the key to a good corpus creation. Larger sums need to be invested.

If you do not own equities till now, experts advise to divert all fresh investment into equity mutual funds, either in lump sum or through the systematic investment route. “Those already allocating money towards equity should invest at least 50 per cent of the corpus in equity. If you are worried about hedging your portfolio, you can have gold as part of your debt allocation,” says Hemant Rustagi, CEO, Wiseinvest.

Buy some life insurance as well. And it needs to mirror your income for at least five years.

Nearing retirement
If you have only five years before you retire, at best you can opt for a debt-oriented hybrid fund or monthly income plans, which invest 25 per cent in equities, according to financial planners. A part of any fresh investment can be put into these schemes.

Again, opt for growth plans that will give indexation benefits of 20 per cent over a year’s time — 10 per cent without indexation. There is no mention of any change in DDT that is applicable to debt funds in the DTC Bill. Currently, debt funds are levied a DDT of 14.16 per cent.