Will Shifting Investments in Retirement Reduce My Taxes?

Ans: For tax-saving investments, it's wise to continue with the Parag Parikh Tax Saver Fund due to its consistent performance and diversified portfolio. However, consider replacing the other tax-saving fund with a more established option like a well-rated ELSS fund for potential higher returns.

As for non-tax saving funds, your current selection is diversified across different market segments, which is good. To enhance your portfolio, you might want to consider adding a flexi-cap fund to gain exposure to various market opportunities. Increasing your SIP amount is also a good move for long-term wealth accumulation.

Ans: To help you optimize his long-term tax savings, a well-rounded approach leveraging mutual funds (ELSS), PPF, and NPS will provide both tax efficiency and growth potential, balancing risk and security. Here’s a comprehensive strategy:

Key Investment Options:

1. Public Provident Fund (PPF):

• Tax Deduction: Up to Rs 1.5 lakh under Section 80C.
• Lock-in: 15 years, providing low-risk, government-backed returns (around 7.1%).
• Strategy: Maximize PPF contributions to Rs 1.5 lakh annually for stable, long-term, and tax-free growth.

2. National Pension System (NPS):

• Tax Deduction: Rs 1.5 lakh under Section 80C and an additional Rs 50,000 under Section 80CCD(1B).
• Equity Exposure: NPS offers flexibility in equity allocation, providing the potential for higher long-term returns.
• Strategy: Contribute Rs 50,000 for the additional tax benefit and build a retirement corpus, balancing equity and debt for moderate growth.

3. Equity-Linked Savings Scheme (ELSS):

• Tax Deduction: Up to Rs 1.5 lakh under Section 80C.
• Lock-in Period: 3 years (shortest under 80C).
• Growth Potential: Higher returns due to equity exposure.
• Strategy: Start a Systematic Investment Plan (SIP) in ELSS funds to benefit from tax savings and market-linked growth over the long term.

4. Comprehensive Plan for you:

a. Maximizing Tax Benefits:

• Contribute Rs 1.5 lakh to PPF for safe, consistent returns.
• Invest Rs 50,000 in NPS to take advantage of the additional tax deduction under Section 80CCD(1B) and build a retirement corpus.
• Allocate any remaining eligible tax-saving contributions to ELSS to optimize growth under Section 80C.

b. Diversified Investment Strategy:

• PPF: A risk-free option with guaranteed returns, perfect for long-term, low-risk growth.
• NPS: A moderate-risk option with the potential for higher returns through equity exposure, focusing on retirement planning.
• ELSS: A higher-risk, higher-reward option for long-term wealth creation and tax savings.

c. Additional Tax-Saving Measures:

• Health Insurance Premiums: Claim up to Rs 25,000 (or Rs 50,000 if covering senior citizen parents) under Section 80D.
• Home Loan Interest: Deduct up to Rs 2 lakh under Section 24(b) for home loan interest payments.

d. Tailored Recommendations:

• PPF: Max out the Rs 1.5 lakh limit to secure risk-free growth.
• NPS: Contribute Rs 50,000 annually to build a retirement corpus while enjoying additional tax benefits.
• ELSS: Invest the remainder of your Section 80C limit in ELSS to benefit from equity market growth.
• Regular Monitoring: Review and rebalance your portfolio as your financial goals evolve to ensure optimal growth and tax savings.

By following this balanced and diversified strategy, Kunal can optimize his tax savings while securing a solid financial future for his long-term goals.

Ans: It's great that you are preparing for your retirement with a clear picture of your corpus. Based on your current investments and the Rs 1 crore you expect to receive after retirement, it’s essential to structure a well-diversified retirement plan. Let's explore how to manage this amount wisely to ensure a smooth and comfortable retirement.

You have a mix of investments in stocks, mutual funds (MFs), and land, which indicates a diversified portfolio. However, once you retire, your investment strategy needs to shift towards safety, steady returns, and liquidity.

Assessing Your Retirement Needs

Before deciding on your investment strategy, it’s important to assess your monthly expenses. You have mentioned that your wife receives a pension of Rs 50,000 per month. It’s a good foundation, but you will need to estimate whether this amount is sufficient to cover household expenses, healthcare costs, lifestyle needs, and unforeseen expenses.

If your monthly expenses exceed Rs 50,000, you will need to create a strategy to generate additional income from your investments.

Allocation of the Rs 1 Crore Corpus

When you retire, you’ll need to protect your corpus while still generating returns. Here’s a basic framework for how you can allocate your Rs 1 crore:

Emergency Fund (15-20%)

Keep aside Rs 15-20 lakhs in a safe and liquid investment such as fixed deposits or liquid mutual funds. This will act as an emergency fund and ensure that you have quick access to cash whenever needed without compromising on your long-term investments.

Debt and Fixed Income Instruments (40-50%)

At this stage, safety is key, and you should allocate a large part of your retirement corpus to secure, fixed-income products. This ensures capital protection while giving regular income. You can invest in government bonds, fixed maturity plans (FMPs), or senior citizen savings schemes (SCSS).

These instruments provide predictable returns and are low-risk, making them ideal for retirees seeking steady income. These will also help protect your investments from the volatility associated with stocks.

Equity-Linked Mutual Funds (20-25%)

While you want to play it safe during retirement, keeping a portion of your corpus in equity-linked funds is important. These can generate inflation-beating returns in the long term.

Opting for well-managed, actively managed funds is more suitable than index funds. Actively managed funds have a higher potential for growth as the fund manager adjusts the portfolio to market conditions. This provides an opportunity for better returns compared to index funds, which mirror market indices and are more passive.

Monthly Systematic Withdrawal Plan (SWP)

To generate a regular income, you can invest a portion of your corpus in mutual funds and set up an SWP. This will allow you to withdraw a fixed sum every month, ensuring a steady flow of income post-retirement without exhausting your investments too soon.

Health Insurance and Contingency Fund

Healthcare costs can be a significant burden during retirement. Ensure that both you and your wife are covered under a comprehensive health insurance plan that provides adequate coverage.

Also, build a contingency fund specifically for medical expenses. This can be parked in liquid funds or savings accounts.

Managing the Rs 83 Lakhs from the Property Sale

You mentioned that you recently sold a property for Rs 83 lakhs without making any profit. However, you need to understand if any capital gains tax liability applies. The property sale, even if no profit was made, could still attract capital gains tax depending on the indexed cost of acquisition and the actual sale price.

Here are the next steps for managing the Rs 83 lakhs:

Exemption on Long-Term Capital Gains

To avoid paying capital gains tax, you can consider reinvesting the proceeds into specified avenues under Section 54 or Section 54EC of the Income Tax Act.

If this was a residential property, reinvesting in another residential property within a stipulated time period can exempt you from long-term capital gains tax under Section 54.

Alternatively, you can invest in capital gains bonds (54EC bonds), which offer a tax exemption on the gains. These bonds have a lock-in period of five years, and while the returns are modest, they provide a safe and tax-efficient way to manage your gains.

Final Insights on Your Retirement Plan

To summarise, your retirement plan needs a balance between generating sufficient income and ensuring capital protection. Here's a detailed step-by-step approach:

Create an emergency fund with Rs 15-20 lakhs for liquidity.

Allocate 40-50% of your corpus to safe, fixed-income instruments like government bonds or SCSS for regular income.

Maintain 20-25% in equity-linked mutual funds for growth and inflation protection.

Use an SWP to withdraw a fixed sum monthly to cover additional income needs.

Calculate your capital gains from the property sale and reinvest in Section 54 or 54EC instruments to save on taxes.

Ensure you have comprehensive health insurance coverage to manage medical expenses.

By following this approach, you will ensure your financial independence in retirement and can confidently enjoy the next phase of your life.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

Ans: In equity oriented MFs (65% or more equity), investments withdrawn on FIFO basis are taxable as short term capital gain (Taxed at 20%) for < 1 Year and Long term capital gain (Taxed at 12.5% flat, if LTCG exceed Rs 125000 in a year) for > 1 year investments. You can plan to withdraw Rs 2 Lakh MF investments resulting in LTCG first then go for withdrawal resulting in short term capital gain. It is possible that by that time these investments might complete 1 year for reckoning as LTCG. Capital gains upto Rs 125000 in a year are not taxable and further short term capital loss (if any) can be adjusted against LTCG.

Ans: You’ve done well by building investments in mutual funds, PPF, and FDs.
Even after moving abroad, maintaining your financial base in India shows maturity.
Now, it’s important to adjust for taxation, rules, and smart planning.
Let’s understand the full picture from a 360-degree perspective.

» Understanding Your Resident Status

– You’ve moved to the US for work.
– Your residential status in India changes to NRI (Non-Resident Indian).
– This change affects taxation on Indian investments.
– Your income earned in India is still taxable in India.
– You also need to report these in the US, as per US tax laws.
– Double taxation risk exists, but treaties reduce the burden.

» Tax Implications on Mutual Funds (India Side)

– You hold Rs 23 lakhs in Indian mutual funds.
– If they are equity mutual funds, taxation applies only on sale.
– LTCG above Rs 1.25 lakh is taxed at 12.5%.
– STCG is taxed at 20%.
– If they are debt funds, gains are taxed as per slab.
– No extra NRI surcharge in India for mutual funds.
– TDS (Tax Deducted at Source) applies for NRIs on redemption.
– Equity fund TDS is 10% on LTCG and 15% on STCG.
– Debt fund TDS is 30% flat on gains.
– This TDS is deducted before payout.
– TDS is not the final tax. You still must file return in India.
– You can claim refund if tax paid is more.

» Tax Implications in the US on Indian Mutual Funds

– US treats Indian mutual funds as PFICs (Passive Foreign Investment Companies).
– PFIC rules are complex and strict.
– Reporting is required under Form 8621.
– PFIC gains are taxed unfavourably with interest penalty.
– Gains can be treated as ordinary income, not capital gains.
– Tracking and filing PFIC taxes need a specialist CPA in the US.
– So, redemption of Indian mutual funds may trigger US tax complications.
– It may result in more tax in the US than in India.

» What Should You Do with Indian Mutual Funds?

– Don’t redeem without checking US tax consequences.
– If you need money, redeem only part—not full.
– Check if you can meet the need from FD or PPF.
– Redeem mutual funds only when other sources are not enough.
– Track cost of purchase and holding period.
– Work with a Certified Financial Planner and a US-based tax advisor.
– They can help reduce PFIC tax impact.

» Why Regular Funds with MFD + CFP is Better

– If you continue investing in India, prefer regular plans.
– Avoid direct funds as they give no guidance.
– As an NRI, your risk profile and taxation are complex.
– A Certified Financial Planner can adjust fund selection accordingly.
– They guide you on rebalancing and timing redemptions.
– Direct funds don’t offer any emotional or strategic help.
– Regular plans via MFD + CFP are safer and more efficient.
– You pay for service, but avoid bigger financial mistakes.

» Why You Should Avoid Index Funds as NRI

– Index funds are passive. They follow the market blindly.
– In volatile phases, they don’t protect downside.
– They also invest in poor-performing companies just due to weight.
– As an NRI, you need active risk management.
– Actively managed funds adjust allocation based on economic trends.
– Fund managers exit weak sectors and protect capital.
– Index funds lack this agility.
– Avoid them unless you are deeply involved in market tracking.
– For peace and performance, active funds are better.

» Tax Impact on PPF Account

– You can’t extend PPF account after NRI status.
– But existing PPF can continue till maturity.
– Interest is tax-free in India.
– But the US may tax PPF interest as income.
– That depends on your US tax filing and your CPA’s method.
– Don’t withdraw PPF unless urgent.
– Let it mature. Don’t invest fresh if not allowed.

» Tax Impact on Fixed Deposits

– Interest from FD is taxable in India for NRIs.
– TDS is 30% on interest earned.
– If interest exceeds Rs 5,000 annually, TDS applies.
– Declare FD interest in India and in the US.
– You may have to pay tax in US on global income.
– But India-US DTAA may give tax relief.
– Choose NRO FD if you retain it.
– You cannot hold resident FD once NRI.
– Inform the bank and convert account to NRO/NRE as needed.

» Currency Conversion and Repatriation Rules

– If you redeem mutual funds or FDs, check RBI repatriation limits.
– You can repatriate up to USD 1 million per financial year.
– Use form 15CA and 15CB (from a CA) for large transfers.
– Bank may also need FEMA compliance documents.
– Keep all KYC updated to avoid transaction delays.

» What to Do Before Redeeming Any Investment

– Confirm your Indian residential status change with all AMCs and banks.
– Update KYC to NRI status.
– Convert savings accounts to NRO/NRE if not yet done.
– Speak with your Certified Financial Planner in India.
– Speak with a CPA in the US.
– Create a plan for phased withdrawal if needed.
– Avoid full redemption unless funds are urgently needed.

» Smart Moves if Withdrawal is Needed

Use FD money first – It’s simple and avoids PFIC issues.

Avoid redeeming equity mutual funds unless really needed.

If you must redeem, do it in small parts.

Redeem funds with long holding first to reduce tax.

Choose funds with lower gains to minimise tax impact.

Avoid liquidating everything at once.

Use SIP stoppage instead of full exit if possible.

Keep all documents and transaction history ready.

Track TDS and file returns in India to claim refund if applicable.

» Emergency Access Planning

– Keep Rs 1–2 lakh in NRE savings account.
– Keep some liquid mutual fund units if PFIC tax is manageable.
– Avoid using PPF unless fully matured.
– If emergency is short-term, use US income or ask for support from US-side accounts.
– Avoid moving money unless critical need.
– Each repatriation from India to US carries cost and paperwork.
– Plan ahead for any such movement.

» Reassess Financial Goals Post-Move

– Your risk profile and priorities have now changed.
– India investments were made for Indian goals.
– Now, decide if you’ll return to India or settle in US.
– If you return, retaining mutual funds is fine.
– If staying in US, slowly move capital to US-compliant instruments.
– Avoid keeping too much in India that’s hard to monitor.
– A Certified Financial Planner can help restructure for new goals.

» Insurance and Estate Planning Now Becomes Important

– Ensure nominees on all Indian accounts are updated.
– Create a Will for Indian assets.
– Also consult a US lawyer for estate planning there.
– Avoid joint accounts if legal succession is unclear.
– Keep account access documents safe and accessible to spouse or family.
– Don’t leave assets scattered without clarity.
– Regularly update this list every year.

» Common Mistakes to Avoid

– Ignoring PFIC rules and ending up with huge US tax bills.
– Using direct mutual funds without tax strategy.
– Keeping resident accounts after becoming NRI.
– Not filing Indian tax return due to “NRI” status.
– Thinking Indian investments are tax-free in the US.
– Making fresh PPF contributions after becoming NRI.
– Redeeming all funds in panic without strategy.

» Final Insights

– You’ve done well by building multiple assets in India.
– Now, being in the US, the rules are different.
– Tax in India is still clear and manageable with proper planning.
– But US tax laws are complex and may penalise without correct reporting.
– Mutual fund redemptions, if needed, must be phased.
– PPF and FD should be left to mature unless urgent.
– Avoid direct and index funds now. Go only with active funds through a Certified Financial Planner.
– Don’t break investments without advice from both Indian CFP and US CPA.
– Review all assets, nominees, and goal alignment yearly.
– Keep your investment plan fluid and updated for your new life abroad.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment