The pension you get from the employer at retirement is taxed under the head salaries while filing Income Tax Returns.
Every individual wants to maintain the same living standards during retirement years as the pre-retirement years have been. Planning for it well on time can help you achieve the retirement goal trouble-free. However, one should know the fact that pension income can also get taxed which means your income after retirement can get reduced to the extent of tax incidence. Therefore, it is important to understand how you can reduce these tax burden after retirement and get the desired monthly take home for which you have planned earlier.
The pension you get from the employer at retirement is taxed under the head salaries while filing Income Tax Returns. The pension could be paid periodically, say each month. If you wish, you may take the pension as a lump sum called commuted pension instead of periodic payments. The periodic payment of pension is called uncommuted pension.
“The uncommuted pension is fully taxable as salary. However, for a Government employee, commuted pension is tax exempt, but for a Non-Government employee it is partially exempt. The pension income is added to taxable salary and you are taxed as per income tax slab,” said C.S.Sudheer, CEO and founder, IndianMoney.com
Funding income through a superannuation fund
On retirement, the superannuation fund purchases an annuity out of the accumulated amounts to meet the pension obligations of the employee. This annuity would be taxed under the head salaries and qualifies for the standard deduction.
Sudheer said former employees receive arrears of salary or even a bonus, a year subsequent to his/her retirement. “These arrears are taxed as salary and qualify for the standard deduction,” he said.
Here are five ways through which you can reduce taxes from your pension income.
==|| Standard Deduction
You can reduce taxes through the standard deduction introduced under the Finance Act, 2018. This is Rs 40000 a year allowed against salary income. This standard deduction replaced the medical reimbursement of Rs 15000 a year and the transport allowance of Rs 19200 a year, enjoyed by salaried employees.
“The introduction of the standard deduction against pension income was a boon to pensioners who received neither medical reimbursement nor a transport allowance. Standard deduction reduces taxable income and this translates to lower taxes,” he said.
==| Deduction from section 80C
Pensioners can make use of Section 80C to reduce taxes on pension income. You get a tax deduction up to Rs 1.5 Lakh a year under Section 80C on certain investments and expenses which qualify for this deduction. This is a collective deduction up to a maximum of Rs 1.5 Lakh a year. Pensioners can invest in a Senior Citizens Saving Scheme (SCSS) and save taxes on pension income under Section 80C.
==| Deduction from section 80TTB
According to the Finance Act 2018, a New Section called Section 80TTB has been introduced. A deduction up to Rs 50000 a year is allowed in case of a senior citizen on interest income earned from a bank, post office and Co-operative society engaged in the business of banking. This deduction is available for the Financial Year 2018-19. A pensioner can invest pension income in a bank deposit and interest income is tax deductible up to Rs 50000 a year under Section 80TTB.
==| Deduction from section 80DDB
Taxpayers who have dependents with specified diseases (listed diseases) can claim this deduction. Dependents, in general, are classified as spouse, children, parents and siblings. “Senior Citizens can claim Rs 1 Lakh a year or the amount actually paid, whichever is less. Senior citizens can use Section 80DDB to save tax on pension income by spending pension income on the treatment of the dependent and saving tax,” added Sudheer.
==| Deduction from section 80D
If a senior citizen avails a health insurance plan, he is eligible for a tax deduction under Section 80D up to Rs 50000 a year on premiums paid. Pension income can be used to pay the premiums on a Senior Citizen health insurance plan and save tax.
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