Five best ways to save tax and create a retirement corpus

Tax planning not only saves income tax but also allows you to create a corpus that will help you retire rich or fund big-ticket purchases. Here are five financial instruments that offer the best combination of tax savings and long-term investments

Karan Deo Sharma
Updated On
New Update
Five ways to save tax and create a retirement corpus

Five ways to save tax and create a retirement corpus

We are in the last month of this financial year. This is the time of the year when Indians especially those with salaried jobs look for investment avenues to save income tax. Most of these investment avenues are long-term savings and investment instruments. They help you either build an asset or create a corpus that will help you retire rich or fund big-ticket purchases a few years down the road. 

This kind of forced savings and investment is the most important but the least appreciated part of tax planning. 

So here are some ways to save your tax outgo in the current fiscal besides forcing you to save for future exigencies.

1. Employee Provident Fund (EPF). The annual contribution to the employee provident fund (EPF) is completely tax-free free under Section 80C. You can save a maximum of Rs 1.5 lakh per annum by investing in a provident fund account. 

With an annual interest rate of 8.1 percent, EPF is the best way to save tax and create a corpus that will fund your retirement or child’s education. 

You can also make a partial withdrawal from your EPF for big-ticket purchases such as buying a home, your kids' wedding or to pay for a medical emergency. This combination makes EPF one of the best tax-saving instruments available right now.

If the annual contribution to your company’s EPF works out to be less than Rs 1.5 lakh or Rs 12,500 per month then you can always request the accounts department in your organisation to raise your (employee’s) share of EPF contribution. Other tax savings instruments under Section 80C including insurance policies or mutual funds are second best to EPF. 

There is no income tax on EPF withdrawal after 5 years, which makes it one of the most tax-efficient means to save and invest for the long term.

2. Public Provident Fund (PPF). If you are self-employed or work in the gig economy with no social security then open a Public Provident Fund account with one of the top public sector banks. The State Bank of India is the preferred destination for opening a PPF account. A PPF account can also be opened in post offices. Similar to an EPFPPF is a savings cum retirement instrument that aims to provide financial security to people in their old age.

With an annual interest rate of 7.1 percent PPF is one of the best tax planning and savings instruments for business people or self-employed right now.

Just like EPF, you can save tax up to a maximum of Rs 1.5 lakh per annum through PPF. But keep in mind that investment in PPF has a lock-in of 15 years but you can avail of a bank loan against your PPF investment from the third year onwards.

Another good thing about PPF is that the maturity amount is completely tax-free which makes it a highly tax-efficient means to save and invest for the long term.

3. Buy a life insurance plan. If you have not secured your life and your earnings by buying a suitable life insurance policy then this is the right time to buy one. Start with buying a plain vanilla one-line Term Insurance Plan from one of the reputed life insurance companies. Term insurance plans provide the highest level of risk cover or mortality benefit for any given premium.

As a thumb rule, the sum assured under a term plan should be a minimum of 10-12 times your current annual income. 

For example, if your annual take-home pay is Rs 10 lakh, then you should buy a term plan with a minimum sum assured of Rs 1 crore. But if your budget permits you can stretch the sum assured to Rs 1.5 crore.

Also Read: Five things to consider before buying life insurance policy

If you have already insured your earnings capacity with a good Term plan then consider buying Endowment Plans or Whole Life Insurance Plans that provide the option to earn a pension in old age for up to 100 years of age.

Most life insurance companies also offer a single premium plan where you can pay a lump-sum premium amount say Rs 1 lakh or more and get a regular pension or annuity either from the second year onwards or after an interval that suits you, say 10 years. These plans are also tax-efficient vehicles to save for your children’s higher education or marriage.

If you want even higher returns from your investments, then consider buying a Unit-Linked Insurance Plan (ULIP). As the name suggests ULIPs invest in high-risk and high-return assets such as equity and bonds. This offers the opportunity to get double-digit returns over the long term, nearly double the returns from traditional endowment and whole-life plans. But invest in ULIPs only if you can afford to lock in your money for a minimum of 10 years.

4. Invest in Equity Linked Saving Schemes (ELSS) from mutual Funds: ELSS is a diversified mutual fund that invests about 80 percent of the funds into equity. It has a lock-in period of three years, the shortest among other tax-saving instruments. However, it is an instrument that is subject to stock market risks and hence it is advised to stay invested for the long haul. 

The invested amount is exempted from tax under Section 80C of the Income Tax Act (up to Rs 1.5 lakhs per annum). The attractive aspect of ELSS is that any profits you make when you sell or redeem are tax-free up to Rs 1 lakh per annum.

Also Read: How to get the right mix of equity, gold and fixed income in your investment portfolio

5. Join the National Pension Scheme (NPS)The NPS is tailor-made for those of you who have exhausted the Rs 1.5 lakh limit of annual tax saving under section 80C that covers investment in provident fund, insurance, ELSS and principal repayment of housing loan. The investment under NPS provides additional tax savings of Rs 50,000 per annum under Section 80 CCD.

NPS is a market-linked retirement scheme that invests in both equity and debt markets. NPS fund managers follow a life-cycle approach which means that younger investors have greater exposure to equity and as you grow older, equity exposure decreases and debt exposure increases.

But remember, the contributions to an NPS account are locked in until you reach the age of 60. 

After 60 years of age, you can withdraw a maximum of 60 percent of your corpus while the balance of 40 percent must be used to purchase an annuity scheme from insurance companies. For simplicity, annuities are like pension plans that provide you with monthly income till you are alive.

Happy tax planning and investing!

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

Also Read: Top 10 Retirement Mutual Funds

Look up our YouTube Channel