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There are various options available for retirement planning depending upon the risk profile and required fund flow of individual. Other factors which generally affect retirement planning are – years to retirement and tax liability on income earned as well as withdrawals. You can have a complete tax free life if the retirement planning is done with minimum risk. Provident Fund is one such tax saving instrument you can use.
Employee Provident Fund for Retirement Planning
The employee’s share gets deducted from the salary and an equivalent amount is added by the employer. The amount is generally 12% of the basic salary plus DA. The returns are 8.5% p.a. It is fixed, safe and 100% tax free. The best part of an Employee Provident Fund is that it is invested even before the salary reaches you. Hence, no more action is required, and there is no delay. It starts from the very beginning of your career and your employers are getting it doubled, without rating your performance. The returns are guaranteed by the Government of India. Post tax, returns are better than fixed deposits @ 12%, even in terms of safety. The banks are offering up to 10%, but corporate deposits can get 12%.
Public Provident Fund for Retirement Planning
You can deposit from Rs. 500 to Rs. 70,000/- in a PPF during a financial year. The returns are 100% safe and tax free. PPF account can be opened in your spouse’s or child’s name as well. The account is opened for a term of 15 years and can be further extended for 5 years. This is the best investment for those looking for safe and steady returns. The investment of Rs. 70000/- p.a. for 15 years will help you to create a corpus of Rs. 20 lakhs for your retirement.
Money received up to Rs. 5 lakhs at voluntary retirement or termination is exempt from tax. You can take the voluntary retirement benefit from multiple employers, but the tax-free amount is limited to Rs. 5 lakhs. For claiming exemption, the employee must have completed 10 years of service or 40 years of age. Tax-free amount paid at voluntary retirement is limited to a minimum of:
1) Three months of salary multiplied by number of completed years of service, or
2) Balance months left before retirement age multiplied by monthly emoluments at the time of retirement.
Vacancy caused by voluntary retirement should not be replaced. It should be a reduction in workforce.