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

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 1/3^rd 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 1/3^rd 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.

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.

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.

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.