How ELSS mutual funds can be helpful for cash flows during retirement

ELSS or Equity Linked Saving Schemes are mutual funds which enjoy a tax saving benefit under the Section 80C of the Income Tax Act 1961. Investments in ELSS can be made up to a maximum limit of Rs 1,50,000/- per year. This amount can be claimed as deduction from the total taxable income, giving a relief of up to Rs 46,800/- in tax, for taxpayers in high bracket.

80% of the ELSS mutual fund’s investments is in equity and equity related instruments and has a lock-in period of 3 years during which no redemption can be made. This is an added benefit to investors as the funds continue to earn compounded return during this mandatory lock in period and can give capital appreciation that could finance your long-term goals like building a retirement corpus.

Why do you need a retirement fund?

Retirement is the period when you would require a steady income source as the income from gainful employment stops. In order to maintain a standard of living at par with what you are living at present you will also need to factor in the inevitable rising inflation.

For example, let us assume that you are 30 now and you want to retire at 60, which gives you 30 years to save for your retirement. If your monthly expenses are Rs 50,000/ today, then assuming a flat inflation rate of 6% per annum, the same things you spend on today will cost Rs 2.87 lakhs per month after 30 years. Therefore, it is imperative that you start planning for your retirement today and invest in a fund that has the potential to give you returns that can beat inflation and match up to your needs.

Equity investments have historically been able to beat inflation more consistently in comparison to fixed return debt investments like fixed deposits, PPF etc.

You may also like to read how to plan for retirement?

How can ELSS contribute to cash flows during your retirement?

ELSS investments, as discussed above, can be planned in such a way that the wealth accumulated over the years through these instruments can be used to provide a steady source of income during your retirement years. Let us understand this with the help of an example.

Take a scenario where you are 30 years old and you are investing in ELSS as your tax saving plan to take the benefit of 80C. You also want to build a corpus for your retirement which will happen when you are 60. The maximum limit you can claim as deduction from your taxable amount under the said section is Rs 1,50,000/- which let us say, you are investing as a monthly SIP of Rs 12500/- Your investment into ELSS for the next 30 years till you are 60, would be Rs 12500 X 12 months X 30 years (Since you are planning retirement at 60, you will invest for 30 more years).

You may try this SIP calculator for SIP investment planning – Systematic investment planning Calculator

The amount invested in ELSS at the end of 30 years will be Rs 45,00,000/-. Assuming 12% returns on your ELSS investment, the value of your investment would have become Rs 3,85,12,165/- You may invest this amount in a suitable mutual fund scheme and start withdrawing every month through SWP.

The chart below shows the amount you can accumulate over different tenures based on your age now and the time remaining to reach retirement age assumed at 60. For example, if you are 40 now, then you have only 20 years left to invest in ELSS whereby you can accumulate a corpus of Rs 1,14,98,217/-

Disclaimer: The numbers in the table are purely illustrative for Investor Education purposes only. There is no guarantee that the returns shown in this illustration will be achieved. Mutual funds are subject to market risks. Read all scheme related documents and consult with your financial advisor before investing.

At the end of the SIP period, when you are 60, you would like to start getting a steady income for your expenses. Based on your requirement you may choose any amount for your SWP. You should factor in inflation in your SWP; in other words, your monthly withdrawals should increase by the inflation rate every year. In the table below, we are showing your starting monthly withdrawals are multiples of your SIP amount for different SIP scenarios. Every year the monthly SWP withdrawals will increase by 5% (assuming 5% is the inflation rate). You can see that longer your SIP tenure, your post retirement cash-flows increases in multiples. It is therefore important that you start your investments from a young age.

You may also try this SWP calculator – SWP calculator

Disclaimer: The numbers in the table are purely illustrative for Investor Education purposes only. There is no guarantee that the returns shown in this illustration will be achieved. Mutual funds are subject to market risks. Read all scheme related documents and consult with your financial advisor before investing.

Is ELSS still relevant after introduction of New Tax Regime?

The New Tax Regime has lower tax rates for different income slabs compared to the Old Tax Regime. However, the New Tax Regime does not allow deductions, which are allowed under the Old Tax Regime. In the Old Tax Regime you can claim deductions for certain investments or expenses as specified in various sections of the Income Tax Act, 1961 e.g. Sections 80C (e.g. ELSS), 80CCD (NPS), 80D (Health Insurance), 24 (Home Loan interest payments) etc. If you are able to claim some or all of these deductions, the Old Tax Regime may be more beneficial than New Tax Regime. You should consult with your tax advisor to understand which tax regime is more beneficial in your financial situation and make informed decisions.

You can continue your ELSS purely for wealth creation even if you switch to New Tax Regimes. Tax savings need not be the sole purpose for investing in ELSS. Your long term financial goals are equally, if not more, important.

Conclusion

Through this article we tried explaining how a continued long-term SIP in ELSS funds during your working years, can help you withdraw a substantial amount from the accumulated corpus post-retirement.

Contact your Mutual Fund Distributor or a Financial Advisor to understand how ELSS can contribute towards creating robust retirement cash flows for your need.

Disclaimer: An Investor education and Awareness initiative of Aditya Birla Sun Life Mutual Fund.

All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Funds and redressal of complaints including details about SEBI SCORES portal, visit link https://mutualfund.adityabirlacapital.com/Investor-Education/education/kyc-and-redressal for further details.