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Friday, November 21, 2014

Tax Free for Retirement Planning

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Tax Free for Retirement Planning

The total tax-exemption given to long-term returns from equity-based investments is a great retirement savings option, but few savers understand it's significance...

Relatively few Indians save for their retirement, unless they are coerced or tricked into doing so. The cerements include NPS tier 1, provident fund or other mandatory savings which people do because they have no choice. Apart from that, a majority of people simply will not save for retirement unless there could somehow get a break on taxes for doing so. And we all know that our government's beg-borrow-or-steal financial situation is not going to improve any time soon. Which means that no new tax breaks are on the way for the middle class saver and tax payer--all largesse is likely to flow to the super-rich and the poor.

 

The strange thing is that we actually have a great tax break for long-term savings which few of us recognise as one. I'm talking of course about the fact that there's no tax on long-term capital gains on equity-based investment including equity mutual funds and balanced funds. Few investors see this as tax-break but it's not a small advantage. Looking backwards, an investment in an equity fund would have seen your money become about 10 times over the last two decades. If you had invested Rs 2 lakh around 1993, it would be about Rs 20 lakh today and you could withdraw all of it without being liable to pay even a paisa of tax on the income. Equity-backed investments are the only asset class which are completely exempt from tax on long-term gains.

 

It's odd that few people in India see this as the big deal it is in terms of retirement planning. In the US, the standard retirement savings tax break is the so-called 401(k), which has an up front tax-break but taxes returns. But there's also the so-called Roth IRA break where the investments don't get you a tax-break but the gains are tax-free. The UK has a similar 'ISA' scheme. The interesting thing is that all these have an upper limit for investments. In contrast, Indian tax laws offer us a similar but limitless tax break but we don't use it for retirement savings because it doesn't save tax up-front.


 

 

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