Retirement corpus at the back of your mind? Here are investment options to build one

• By investing in mutual funds during your working years and using SWP after retirement, you can receive a predetermined amount periodically.
• The NPS offers a way to save for retirement, allowing contributions during working years for a post-retirement fund.
• Annuity plans and guaranteed income plans are both designed to provide a stable income flow, yet they differ in how they work.

If you are not in a job which will give you pension, then it is hard truth that post-retirement the monthly salary flow will stop. However, the expenses won’t and thus it is important to build a corpus for it. Moreover, life expectancy is on the rise and this means that retirement planning has become even more important.

We look at some investment options you can consider to build your retirement corpus.

Voluntary provident fund

Each month, your employer deducts a mandatory 12% from your basic salary, including dearness allowance, and allocates it to the Employees' Provident Fund (EPF). Interestingly, you have the option to contribute significantly more than this obligatory 12% deduction. This is referred to as a voluntary provident fund (VPF).

Investing in a VPF offers a significant advantage as contributions come from your pre-tax income. To boost savings, you can increase VPF contributions beyond the mandatory 12% from your basic salary. Presently, it yields an 8.15% interest rate, subject to annual revision.

However, note that apart from government employees, the tax exemption limit for a single year stands at ₹2.5 lakh. If your EPF contributions exceed this ₹2.5 lakh threshold, interest earned on the surplus EPF becomes taxable from the fiscal year 2021-22.

“If you decide to boost your VPF contributions, you have the flexibility to do so at any point during your employment. However, it's worth noting that many employers typically provide this option at the beginning of the financial year. Your contribution to the Employees' Provident Fund (EPF) is also eligible for a deduction under Section 80C of the Income Tax Act, with a maximum limit of Rs 1.5 lakh,” says Akhil Bhardwaj, senior partner, Alpha Capital, a wealth management firm.

Mutual funds

While there are retirement specific mutual funds, you can use mutual funds on your own to build a retirement corpus. By investing in mutual funds during your working years and using a systematic withdrawal plan (SWP) after retirement, you can receive a predetermined amount periodically. This method enables you to convert your accumulated fund into a steady income source while potentially continuing to benefit from the investment's growth.

“You can also use the best SWP mutual fund to steer a retirement plan for yourself. For regular income post-retirement, you can chalk out a list of mutual funds of your choice and start an SWP from it post-retirement. If well planned, SWP can be an excellent support for regular income after retirement,” says Akhil Bhardwaj, senior partner, Alpha Capital, a wealth management firm.

Every withdrawal will be subjected to the capital gains tax of the fund you are invested in. For example, in equity mutual funds, short-term capital gains (less than 12 months) are taxed at 15% irrespective of your income tax bracket. Any long term capital gains for equity mutual funds are tax free up to ₹1 lakh a year. Any long term capital gains exceeding this is taxed at 10% without indexation benefit.

National Pension System

NPS offers a way to save for retirement, allowing contributions during working years for a post-retirement fund. NPS aims to secure financial stability by offering a pension income after retirement.

Upon reaching the age of 60, NPS subscribers are required to allocate a minimum of 40%of their NPS corpus to purchase an annuity from a life insurance company.

“Simultaneously, they have the option to withdraw up to 60% of their NPS corpus as a lump sum, which is completely exempt from taxation. If a subscriber opts not to withdraw the entire NPS corpus at the age of 60, they possess the flexibility to postpone the lump sum withdrawal until they reach the age of 70,” says Bharadwaj.

When it comes to taxation, employees can get a tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of ₹1.50 lakh. Tax deduction up to ₹50,000 under section 80 CCD(1B) over and above the overall ceiling of ₹1.50 lakh under Sec 80 CCE is available.

One is also eligible for tax exemption on lump sum withdrawal of 60% of accumulated pension wealth upon attaining the age of 60. While there is eligible for purchase of tax exemption when purchasing an annuity, the subsequent income received from annuity is subject to tax at applicable rates according to the tax slab.

Annuities and guaranteed income plans

Annuity plans and guaranteed income plans are both designed to provide a stable income flow, yet they differ in how they work.

Annuity plans, typically offered by insurance companies, involve investing a lump sum or periodic payments in exchange for regular payments, often for life or a predetermined period. These plans offer various options like immediate or deferred annuities, providing flexibility in when the payment starts.

Guaranteed income plans, on the other hand, ensure fixed payouts regardless of market fluctuations, offering income for a specific term or life. “You pay a premium annually. They give you anywhere between 6.2% to 6.4% guaranteed tax-free return and a risk cover is also available till the policy starts to provide you with regular income , which is not available in an annuity,” says B. Srinivasan, director and founder, Shree Sidvin Investment Advisors.

Both guaranteed income plans and annuities provide a tax benefit of up to ₹1.50 lakh under section 80C. However, in case of the annuities, the monthly payouts are taxable as per your tax slab.

On the other hand, payouts under guaranteed income plans are tax free provided the premium paid on the policy does not exceed 10% of the sum assured. Both annuities and guaranteed income plans will provide low returns, but returns from annuities may be slightly higher, as they do not have mortality costs.

“Both Guaranteed Income Plans (Endowment Plans) and Annuities offer regular income and are low-risk options. If one wants guaranteed returns and tax benefits, Guaranteed Income Plans may be a better option. But if one wants higher returns and low flexibility, annuities may be a better option,” says Abhishek Kumar, SEBI Registered Investment Adviser and Founder, SahajMoney.com.

“The income after retirement should come from 4-5 sources with each source generating 20-25% of the total requirement,” says Srinivasan.

The investments you choose will depend a lot on your circumstances, your requirements and the amount of risk you are willing to take.