ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Tips for Tax Saving & Fund Management by Retired Indian Govt. Employees

Updated on December 4, 2018

Retirement Benefits and Taxation

Superannuation benefits include pension, gratuity, general provident fund and leave encashment. After receiving pensionary benefits, one has to plan investment of spare money in an efficient manner to earn high returns on it and minimize the taxes. Making the best use of retirement money to keep tax liability at minimum and maintain a regular inflow of income is of utmost importance. Pension is taxed at prevalent rates for senior citizens depending on type of pension. Commuted pension is the fraction of pension amount commuted to receive a lump sump amount of money at retirement. Commuted pension is fully exempt from income tax in case of government employees but non-government employees are entitled for a tax exemption up to 1/3rd of total amount of gratuity and commuted pension. Half of the commuted pension is exempted from the income tax for the private employees who do not receive gratuity. Irrespective of the category of retiring employee (government or non-government), non-commuted pension or amount received periodically (monthly) is taxable at prevalent income tax rates under the ‘Head of Salaries’. From financial year 2018-19, government has allowed a standard deduction of Rs. 40000/- from the income. If pension is received by a family member of employee as family pension, only 1/3rd of the non-commuted pension or Rs. 15000/- whichever is less is exempted from the income tax. Pension to a government employee is remitted by a nationalized bank and tax is deducted at source as TDS by the payee bank. In case of family pension, TDS is not deducted by the bank. General Provident Fund (GPF) is fully exempted from tax since it is a recognized provident fund. However, amount received from Contributory Provident Fund (CPF) and Employees Provident Fund (EPF) is taxed differently. Employer’s contribution to PF and the interest credited to these funds is taxed as per the prevalent tax rules if employer’s contribution exceeds 12% of salary of employee and any interest paid more than 9% per annum. EPF corpus is also taxable if an employee fails to complete 5 years of continuous service. Gratuity and leave encashment is exempt from income tax for government and public sector employees.

A sample of a pensioner's ITR receiving 10 lakh pension

Income Tax Return
 
Gross Total Income
 
1) Salary
1265313
2) Income from House Property
0
3) Income from other sources
0
Gross Total Income
1265313
Deductions
 
1) 80C - Life insurance premia, deferred annuity, contributions to providen
104664
2) 80CCG - Investment made under an equity savings scheme
0
3) 80 D: Health Insurrance
0
4) 80 DDB: Medical treatment of specified disease -
 
5) Interest on loan taken for higher education
0
6) 80EE - Interest on loan taken for residential house property
0
Total Deductions
104664
Total Taxable Income
1160650
Computation of Tax
 
Tax payable on total income
158159
Cess
4746
Total Tax
162945

Savings & Deductions

It is apparently visible from the above example that Mr. ‘X’ has received an amount of Rs 10.9 lakh as pension during the financial year 2017-18. He has invested an amount of Rs 25.5 lakh in FDs and NSS certificates as senior citizen and earned an interest of Rs. 1.74 lakh. So, his total taxable income becomes about 12.6 lakh. It is seen from his savings that he just could save 1.0 lakh rupees and, in this way, he failed to fully utilize rebate of 1.5 lakh and missed an opportunity to avail tax exemption on Rs. 50,000=00. Scrutiny of deductions shows that he also missed opportunity to get deduction u/s 80D since he did not buy any health insurance scheme like Mediclaim that could help him pay his expenses in case of medical urgency and save tax on invested amount (Rs. 30000). From 2018-19 financial year, limit of deduction in case of health care has been enhanced to Rs 50000 from the existing limit of Rs 30000/- for senior citizens. Other opportunities lost by him included non- availing any loan on house property or education on account of higher education for any of dependents.

Let’s now examine what options he had to avail rebate under section 80C to take full advantage of rebate available (1.50 lakh) under it. Options available under 80C are as follows:

i) Public Provident Fund (PPF) – lock-in period is 15 years,

ii) Fixed Deposits in banks (lock in period is 5 years),

iii) Equity Linked Saving Schemes (ELSS)- lock in period is 3 years.

PPF is exempted from income tax at both investment and maturity stages and one can deposit up to Rs. 100000 every year in PPF. Interest on PPF is revised every year. A part of your PPF amount (not exceeding 50%) can be withdrawn from 7th year under certain conditions after producing evidences and a loan against the corpus is allowed from 3rd year onward. However, the lock-in period under PPF is 15 years.

There are several schemes for fixed deposits and retirees can avail rebate u/s 80C.These includes Senior Citizens' Saving Scheme (SCSS), Post Office Monthly Income Scheme (POMIS), Bank Fixed Deposits (FDs) etc. All these schemes have 5 years lock-in period and earns interest at prevailing rates.

Invest in ELSS

Equity Linked Savings Schemes (ELSS) are considered as one of the most promising tax saving options. These are equity mutual funds that invest money in equity and securities of companies with strong growth potential.Since these funds are managed by experts, invest in ELSS is a good way to get exposure to equities. Equity Linked Saving Schemes (ELSS) have comparatively less duration of lock-in period (3 years) than the above schemes. Although returns under ELSS are always prone to market risks but past performance of the schemes show that they provide substantially higher returns than other schemes. Investment of Rs 1.0-1.5 lakh continuously for three years may assure a regular income and systematic investment in future by recycling invested money 4th year onward under 80C for a long period. Investment up to 1.5 lakh every year continuously for three year and returns on maturity of ELSS instrument from 4th year onward would help to maintain your continuous tax saving investment in future. Since government has levied a tax on long term capital gains beyond 1.0 lakh earnings, investment of 1.5 lakh may be returning income within 1.0 lakh limit even if returns are taxed as long term investment in future.

Future Tax Scenario

During 2018 budget, Finance Minister has announced some tax benefits such as standard deduction of Rs. 40000 for the 2018-19 financial year. This amount will be deducted from the gross income. Retired employees will find this announcement very useful for them since they do not receive traveling allowance. Now onward, exemption on traveling allowance would not be available to serving employees also.

Exemption limit on interest earned upon bank deposits has been increased from Rs. 10000 to Rs. 50000 for senior citizens and TDS will not not be applicable on fixed deposits.Pensioners will be benefited most from it since their main source of earnings are fixed deposits.

Disclaimer: Care has been taken in providing details related to investment schemes. However, changes occur frequently due to changes in policy adopted by the government and banking system. Hence, readers should cross check the information before investing their money in financial institutions.

© 2018 C V Singh

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://maven.io/company/pages/privacy

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)
    ClickscoThis is a data management platform studying reader behavior (Privacy Policy)