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Individuals work hard to accumulate a retirement fund to meet daily expenses and unplanned expenditure post-retirement. It is a job half done as your money has to yield a return above inflation. Moreover, you still have to pay tax if you don’t invest your retirement fund in the right financial products. The challenge is building a retirement fund to meet a higher life expectancy and keep tax liability at bay.
Let’s take a look at some tips to protect your retirement fund from tax erosion:
Understand the tax implications of different sources of income
“Tax is a significant factor post-retirement as income can easily exceed the exemption limit for senior citizens. You have a threshold exemption limit of Rs3 lakh per financial year for senior citizens and Rs5 lakh for the super senior citizens under the old tax regime," said Archit Gupta, founder and chief executive officer, ClearTax.
Invest part of your retirement fund in financial products where the yearly outflow, or maturity amount, is tax-free. For instance, retirees may invest in tax-free bonds where the interest payouts are tax-free.
Gupta said, “You may choose highly rated bonds for the safety of the investment. Moreover, interest offered by tax-free bonds ranges from 5.5-6.5% per annum. Tax-free bonds have a maturity period of 10-15 years. It is suitable for retirees who don’t require funds immediately and fall in the higher income tax brackets."
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