Tax payment can be every working professional’s nightmare. Although you might dread tax payment, you should compulsorily pay taxes. While taxes can be an inevitable part of your financial planning after you start earning, have you imagined what role can tax play after retiring? Although your tax liability might significantly decrease after your retirement, you might still qualify to pay them regularly.
There are various pension plans available in the market that can allow you to reduce your tax burden after retirement. Since there are multiple options, you should not get lost in the pool of searches. To help you make the right choice at the time of purchase, here’s a list of the two most essential types of retirement plans in India that can allow you to reduce your tax liability with ease. Let’s take a look below:
Pension plans/ Annuity plans
Pension plans or annuity plans can provide a fixed flow of income after your retirement. While many retirement plans in India give you an opportunity to decide the date on which you can receive the payout, the rest of them can offer you a life cover during an unfortunate event.
Under pension plans, you can find different types available in the market:
- Immediate Annuity
An immediate annuity plan can be a guaranteed pension plan that provides you with a regular income in return of a lump-sum payment. Once you make a lump-sum payment, your insurance company can offer you the payout immediately to ensure that you meet your monthly expenses after retirement.
One of the biggest advantages of an immediate annuity plan can be that the interest is taxed as ordinary income. Since it can act as a return on investment, the principal amount can be exempted from the payment of taxes. After your insurer offers you with the whole principal amount, the payments can be taxable. The income tax rate can be based on the income that you earn during that period. Since you might withdraw the money after you enter your retirement period, the income tax rate can be relatively low.
- Deferred Annuity
The deferred annuity plan can divide the contributions made towards it into two stages:
Accumulation stage
Under the accumulation stage, you should regularly pay the premium.
- Income stage
When your selected plan reaches the income stage, you can withdraw at least 1/3rd of your invested capital, while the remaining amount can be directed towards annuities that creates a regular stream of income for you.
Under deferred annuity plans, the tax benefits can let your income grow during the accumulation stage. Moreover, you wouldn’t have to pay taxes on the retirement savings during the premium payment time.
In a nutshell, retirement can seem far away at a young age. However, it can never be too early to begin your retirement planning. When you begin your retirement planning, you should invest in the tools that offer retirement benefits, which include tax benefits. Choose the right pension plan and begin your investment at the soonest to reap maximum retirement benefits. That way, you can lead a comfortable retirement period by avoiding last-minute hassle.