How to Make Your Retirement Plan Tax-Efficient

Saving for retirement is crucial. Recent tax rule changes have impacted many retirement products. But there’s good news: if you earn up to Rs 12 lakh a year, you pay no tax under the new regime. This is a big relief for many. If your income is more than Rs 12 lakh a year, here’s how you can make your retirement plan tax-efficient.

Top 5 Ways to Make Your Retirement Plan Tax-Efficient

1. Invest in Stocks and Equity Funds

Long-term capital gains from stocks and equity funds are taxed at 12.5%. But there’s a Rs 1.25 lakh tax-free threshold. This helps small investors avoid the tax. Here’s what you can do:

• Harvest long-term gains up to Rs 1.25 lakh every year.
• Book profits and reinvest in the same stocks or mutual funds.

2. Consider Unit Linked Insurance Plans (ULIPs)

ULIPs are taxable if the combined premium of policies bought after 1 February 2021 exceeds Rs 2.5 lakh. To avoid this tax, follow these steps:

• Limit your ULIP investments to Rs 2.5 lakh in a year.
• Use mutual funds or the National Pension System (NPS) for additional retirement investments.

NPS investments can also help you save more on taxes.

3. Traditional Insurance Policies

Life insurance plans are taxable if the total premium of policies bought after 31 March 2023 is over Rs 5 lakh. To manage this:

• Keep your traditional insurance plan investments under Rs 5 lakh.
• Use debt funds and the NPS for additional investments.

4. Debt Funds

There is no difference between long-term and short-term gains from debt funds. These funds no longer get the indexation benefit. All gains are added to your income and taxed at slab rates. However, debt funds help defer tax because gains are taxed only when you redeem. Here’s what you can do:

• Continue investing in debt funds.
• Redeem after retirement when your income and tax liability will be lower.

5. Provident Fund

The Provident Fund is often seen as a tax-free haven. But the interest earned on contributions to the Employees’ Provident Fund beyond Rs 2.5 lakh in a year is taxable. To manage this:

• Limit your contributions to Rs 2.5 lakh a year.
• Open a Public Provident Fund (PPF) account if you don’t already have one.
• Consider debt funds to defer tax.

By following these strategies, you can make your retirement plan more tax-efficient. This will help secure your financial future.