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Introduction
Planning for retirement is one of the most important things you can do for your future. We all dream of a tax-free retirement, but the thought of high taxes eating into your savings can be discouraging. What if I told you there’s a way to earn ₹24 lakh annually as a pension without paying any taxes? Sounds too good to be true, right?
In this article, I’ll show you a smart, tax-efficient strategy that can help you and your spouse earn ₹2 lakh per month, or ₹24 lakh annually, with zero income tax. Whether you’re an NRI returning to India or an Indian citizen/resident nearing retirement, this approach can maximize your income while staying within the legal framework.
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Why Tax-Free Retirement Income Matters
India’s tax system can feel complicated, especially for retirees. The last thing you want in your golden years is to deal with big tax bills on your pension. Unfortunately, there’s limited tax relief available for retirees unless you belong to special groups.
But here’s the good news: with smart retirement planning and a well-thought-out tax strategy, you can avoid paying hefty taxes and boost your income. And don’t worry—this is all perfectly legal under the Indian tax system.
Step 1: Understanding Income Splitting
The core of this strategy is income splitting. If you and your spouse are together, the first thing you should do is divide your income equally between the two of you. This is especially helpful if your spouse doesn’t have a high income or isn’t working.
You can start transferring money to your spouse gradually, allowing them to build their own investment portfolio. The savings your spouse builds from household money aren’t taxable for you. With proper planning, you can ensure that 50% of your retirement income is in your name, and the other 50% is in your spouse’s name.
For example, if you’re earning ₹24 lakh annually, you both will receive ₹12 lakh each. This keeps both of you in lower tax brackets and may even help you avoid paying taxes altogether.
Step 2: Choosing the Right Retirement Income Options
When it comes to receiving your retirement income, you have several options, including:
- Annuities
- Fixed Deposits (FDs)
- Mutual Funds
- Stocks
I generally don’t recommend FDs. The interest on FDs is taxed every year, even if you don’t withdraw it. This means a large portion of your earnings can end up being taxed. It’s better to limit the use of FDs in your retirement portfolio.
Instead, focus on long-term mutual funds. They usually offer better returns and more flexibility in terms of tax benefits. But the key isn’t just about choosing mutual funds—it’s also about how and when you sell them.
Step 3: Systematic Withdrawal Plan (SWP) – The Secret to Tax-Free Income
Here’s a simple solution for your retirement: Systematic Withdrawal Plan (SWP). You don’t need to sell mutual funds manually every month to cover your expenses. Instead, set up an SWP, which automatically sells a fixed amount of mutual funds each month and transfers the money to your bank account. This gives you a steady monthly income without the hassle.
Step 4: How It Works – A Real-Life Example
Imagine you and your spouse have been investing in mutual funds for several years. Now that it’s time to retire, you each sell ₹1 lakh worth of mutual funds every month. That adds up to ₹12 lakh per year for each of you, giving you a combined annual income of ₹24 lakh.
Here’s where it becomes tax-efficient: not all the ₹1 lakh you sell each month is profit. Let’s say 50% is your principal (which isn’t taxable), and the other 50% is capital gains. This means you’re earning ₹6 lakh in capital gains per year, well within the tax-free limit under the new tax rules.
Step 5: The New Tax Regime Explained
Under the new tax regime, individuals with an annual income up to ₹7 lakh don’t have to pay taxes. So, if you’re earning ₹6 lakh in capital gains and an additional ₹1 lakh from other sources, like FD interest or rental income, you won’t owe any taxes.
The same applies to your spouse. By splitting your income and filing taxes separately, you can both enjoy tax-free income and together earn ₹24 lakh per year without paying any taxes.
Common Concerns: Is This Strategy Risky?
Some might ask, “Aren’t mutual funds risky?” While investing in the stock market does carry some risk, investing in large-cap, long-term mutual funds is generally safer than other options.
In fact, putting all your money into FDs can be riskier. Indian banks are insured for only ₹5-6 lakh. And while it’s rare, banks can fail. If you have a large sum of money—say ₹3 crore or ₹5 crore—you’re safer putting it in a diversified mutual fund than risking it all in one bank.
Why Annuities and Traditional Retirement Plans Fall Short
Many people turn to annuities for retirement plans, thinking they’re safer. However, these options are usually taxable, and their returns are often lower than what mutual funds can offer. Plus, annuities tie up your capital, leaving you with less flexibility if you need cash quickly.
Mutual funds, on the other hand, give you better returns, flexibility, and tax advantages—if managed wisely.
The Bottom Line: A Legal, Smart Way to Enjoy a Tax-Free Retirement
Planning for retirement with zero income tax is achievable if you plan carefully. By using mutual funds, splitting income with your spouse, and taking advantage of the tax-free income threshold, you can secure a monthly income of ₹2 lakh without worrying about taxes.
This approach is legal, more beneficial in the long run compared to FDs or annuities, and flexible enough for anyone to implement with a bit of forward planning.
Conclusion
It’s never too early or too late to start planning for your retirement. If you’re nearing retirement, now is the time to set up your portfolios and an SWP. If you’re still in your working years, begin investing in long-term mutual funds today for a tax-free, worry-free retirement tomorrow!