Retirement marks the beginning of a new chapter in life. People rely on investment and savings they have made during their working life to enjoy this phase. Tax implication of income during the retirement years is an important aspect as it affects the actual cash flows.
The Income-Tax Act, 1961, provides higher tax slabs for senior citizens to ensure that their tax-liability is lower than others. For tax purposes, an individual who is 60 years old or more at any time during the financial year qualifies as a ?senior citizen?. Any person who is 80 years or more qualifies as a ?very senior citizen?. The following incomes are generally received on retirement:
Gratuity
As a gesture of gratitude for number of years worked, employers make a lump-sum payment to their employees in form of gratuity. While government employees enjoy complete tax-exemption on the amount received, non-government employees are entitled to exemption of up to R10 lakh.
Leave salary
Leave salary equivalent to the unutilised leaves standing to the credit of an employee is paid at the time of retirement. For a government employee, the entire leave salary is tax-exempt, whereas for a non-government employee, the exemption is up to R3 lakh, subject to conditions.
Provident fund
Provident fund is a popular scheme where both employee and employer make contributions. Interest earned is also credited to the fund with the balance accumulating year after year and, on retirement, the entire amount is paid to the employee. Government employees participate in the statutory provident fund and non-government employees in a recognised provident fund. There is complete tax-exemption on the accumulated balance at the time of retirement, subject to conditions.
Compensation received on voluntary retirement
If an individual has taken voluntarily retirement, the compensation received under a voluntary retirement scheme is eligible for tax-exemption, subject to conditions. A maximum exemption of R5 lakh can be availed.
Pension
Pension is the core of retirement. It is the most common form of retirement benefit provided to employees upon retirement. Pensions may be received on a monthly or a periodic basis (also called as uncommuted pension). It can also be paid in the form of a lump sum, which is generally known as a commuted pension. Uncommuted pensions are taxable for all categories of employees; however, where the option of commutation has been exercised by senior citizens, tax-exemption is available subject to certain conditions.
On the death of a senior citizen, the pension received by the spouse is treated as income and taxed. However, the spouse is entitled to a deduction of R15,000 or one-third of the pension amount, whichever is less.
* The author is a director with KPMG. The views expressed are personal