Why is tax-efficient financial planning needed? Disappointing as it may seem, there are various taxes that take a large amount of corpus from your savings to get complete financial freedom after retirement.

Tarun Rustagi, CFO, Canara HSBC OBC Life Insurance says, “Although most of these taxes are largely unavoidable, their overall impact on one’s hard-earned savings can be mitigated.” 

There are two major ways by which you can reduce the burden on your retirement income;

1. Manage your taxable income efficiently

One of the best ways to avoid your savings being axed is to plan your finances in a more tax-efficient manner. Thoughtful planning in advance can help reduce your taxes and will help you retain a substantial amount of your savings for your retirement. 

Rustagi explains, “Under the current provisions, the basic exemption limit is Rs 3 lakhs for senior citizens. However, owing to the exemption under section 87A of the Income Tax Act, one’s tax liability can be zero for taxable income up to Rs 5 lakhs.”

He further adds, “For taxable income more than Rs. 5 lakh, it can be managed efficiently with certain types of tax-saving investments on which deduction under section 80C of the Income Tax Act can claim.” This includes premium payment under a life insurance policy, Senior Citizens Fixed Deposits, Senior Citizen Savings Scheme (SCSS) etc. The maximum limit of deduction available under this section is Rs 1.5 lakhs.

2. Maximize your non-taxable income

Industry experts point out, that an individual can maximize non-taxable income by investing savings into investments which generate tax-efficient returns and on which an individual can claim tax deductions. 

Rustagi explains, “One can maximize tax-free income by investing savings into tax-saving retirement plans that offer EEE tax benefits (Exempt Exempt Exempt), subject to 10 per cent tax on gains above Rs 1 lakh in brackets.”

Such investments are eligible for the following 3 Tax-exemptions:

a) Exemption 1: The amount invested is eligible for a deduction from taxable income
b) Exemption 2: The interest accrued on savings corpus during the compounding phase is tax-exempt
c) Exemption 3: The maturity value earned from investments is also tax-exempt at the time of withdrawal.

EEE benefit applies to mainly long-term investment instruments like 

1. Life Insurance Plans
2. EPF and PPF
3. Equity-linked savings schemes (ELSS)

“As the famous adage goes – ‘A penny saved, is a penny earned’, similarly, if we plan efficiently, we will be able to enjoy our golden years without feeling the brunt of taxes for our earnings,” concludes Rustagi.