Your retirement investments should be in these financial instruments

Capitalstars Investment Advisor

If you are saving for retirement, the portfolio should be a mix of various investment instruments.

Saving for your retirement is possibly one of the most important financial goals. You need to invest in a good mix of financial products to make sure that you accumulate enough to live a comfortable life after you retire. Your job of investing should not end once you retire, you need to have a good mix of investment products even while living in retirement. As usual, there are many factors you need to consider while selecting the right products. And chief among them is taxation. Not taking into account how something is taxed, can be a costly mistake. Here is a look at the products you need to have in your retirement tool kit and how these products are taxed.

When saving for retirement-

Tax-free instruments:

1. Provident fund

This is the bulwark of the retirement savings of salaried people in the organized sector. Mandatory contributions fatten the corpus while tax-free status adds to the attraction. Works best if you don’t withdraw when you change jobs or dip into the corpus before retirement.

2. Public Provident Fund (PPF)

Those not covered by the Provident Fund should opt for the PPF. Otherwise, the Voluntary Provident Fund is a better alternative to this tax-free option.

3. Insurance

Not the best way to save for retirement, but many people are pushed to invest in these. Maturity is tax-free.

Partially taxable instruments:

1. NPS

A low-cost market-linked option that gives tax benefits not available elsewhere. Up to 60% of the corpus can be withdrawn on maturity and will be tax-free. But investors should not get turned off by the compulsory annuitisation of the balance 40%.

2. Equity and balanced funds

Equity-oriented instruments can be very rewarding when saving for a long term goal. Don’t let the volatility of the share market deny you the opportunity to build wealth.

When living in retirement-

Tax-free instruments:

1. Equity-oriented mutual funds

One needs equities to beat inflation. Allocate at least 10-20% of the portfolio to equity linked investments. Returns taxable only above Rs 1 lakh.

Partially taxable instruments:

1. Senior citizens’ saving scheme

Offers assured but taxable returns. The Rs 50,000 tax exemption to interest income has made this attractive. Also, investments get tax benefits under Section 80C.

2. Fixed deposits

Taxable but assured returns. Income up to Rs 50,000 is tax-free. Unlike SCSS and PMVVY, there is no cap on investment.

3. Debt-oriented mutual funds

Give returns roughly equal to fixed deposits but are more tax efficient. Use of systematic withdrawal plans reduces the effective tax rate to 3-4% even for those in 30% tax bracket.

Fully-taxable instruments:

1. Annuity

Offers assurance of pension for life, but takes away liquidity for the investor. Experts say don’t allocate more than 50% of retirement corpus to this option.

2. Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Offers assured but taxable returns. No tax benefits on contribution.