As you start to reach your retirement days, various questions in respect of taxation start to haunt you. Most of the people retire at the age of 60 which not only makes them old enough to work, but also makes them a senior citizen of the nation. This is where your tax planning becomes crucial. As a retiring person, there are various scopes which can used in order to reduce your tax liability. Following are some of the simplest to reduce your tax burden:
Taxability of Retiring person who were Government Employees
If a retiring person worked in a Government organization, then retiring benefits such as Provident Fund, Pension, Gratuity and other benefits are not taxable. In other words, the retiring person can simply collect his retirement benefits and walk away without paying even a single penny as tax.
Taxability of Retiring person who were Non- Government Employees
If a retiring person did not worked or a Government Organization, then most of his retirement benefits becomes taxable. The only exemption which is available to the retiring person is the amount received from a recognized provident fund. Apart from that amount, income received in form of gratuity and pension become partly taxable under the IT ACT.
Nevertheless, a retiring person has various ways to reduce his tax liability through proper tax planning. They are:
Basic Exemption Limit
The IT Department of India has increased the exemption limit for a retiring person. Now people who fall under this category can claim a basic exemption of INR 3, 00, 000 on their total income for a particular AY. In case, the age of a tax payer has reached 80 years, he same exemption limit increases to INR 5, 00, 000.
Use of Reverse Mortgage
A retiring person can use the benefit of Reverse Mortgage with a view to generate regular monthly income from the use of his house property. Under this situation, there are two basic requirements to be followed- the retiring person must own a house and income should be generated on a monthly basis.
No Routine Scrutiny
When a retiring person files his return, the IT Department acknowledges their contributions in the past and offers them a leniency in tax scrutiny. Until and unless there are sufficient grounds to prove the return is defective, the department will not trouble the tax payer.
Medical Insurance Deductions under Section 80D
With age comes the need for superior medical treatments. Retiring people can easily claim INR 20, 000 as a deduction for medical insurance. The benefit of this deduction will increase by INR 10, 000 from AY 2016-17, making it INR 30, 000.
Apart from these tax planning aids, one should forget to file these returns on time and have it certified by a professional. The bottom line is, if you pay your taxes on time you end up having a lower tax liability because issues such as interest on late filing and penalties are absent.
- Pension: Uncommuted pension is taxable as salary. Commuted pension is exempt u/s 10(10A) subject to limit specified therein.
- Gratuity: Gratuity received in excess of limit specified u/s 10(10) is taxable.
- Leave Encashment: Leave encashment is excess of limit specified is taxable.
- Retrenchment Compensation: Any compensation received on retrenchment, in excess of limit specified u/s 10(10B) is taxable.
- Payment from Provident Fund: Accumulated balance in a recognised provident fund, received on retirement is exempt u/s 10(12) provided the condition specified therein are fulfilled.
Tax Planning Tips for Retiring Persons with Retirement Benefits
1. Invest the amount of retirement benefits received under a voluntary retirement scheme/special voluntary retirement scheme, in Senior Citizens Saving Scheme, 2004, carrying interest @9.0% (taxable)
(W.e.f. 1.4.2015 Earlier, the rate was 9.2% for F.Y.2013-14 and 2014-15, 9.3% for F.Y.2012-13 and 9% upto 31.3.2013.)
2. Do not withdraw from Provident Fund A/c immediately, if interest is available even after retirement as interest on provident fund is exempt within limits u/s 10(12).
3. Maximise your contribution to provident fund.
4. Persons over 40 years may open a 15 years P.P.F. A/c also.
5. Plan to withdrawals from NSC 1987 after retirement in accordance with your taxable income. As withdrawal of amounts deposited before 1.4.1992 is taxable.
6. Invest the retirement benefits in monthly income schemes like LIC, Post office monthly etc.