With the Budget 2021 around the corner, senior citizens as well as those nearing retirement or who have retired recently want the government to make retirement benefits as well as pension plans tax-efficient.
A dedicated pension or annuity scheme for senior citizens that bundles similar returns with tax-free pay-outs can ensure that senior citizens have more cash at hand during their retirement.
Union Budget 2021 Expectations for Pensioners: The falling interest rates amid rising inflation have made life difficult for investors, especially the retired who have to depend on pension income for survival. What is worse is that even the annuity or pension received is not tax-free, which is leaving senior citizens with limited funds to meet their household needs. No wonder, with the Budget 2021 around the corner, senior citizens as well as those nearing retirement or who have retired recently want the government to make retirement benefits as well as pension plans tax-efficient.
Take the case of Mr Anup Saxena (name changed), a senior executive who has retired recently. He doesn’t only seem concerned about the falling interest rates, but higher taxes also. He believes the year 2020 was not only the most difficult year to live in, it was also the worst year to retire in.
“That is because not only will retirees get a much lower pension, they will also have to pay higher taxes,” he says, adding that “in order to revive the economy, RBI has enhanced liquidity and driven down interest rates. Retirees are finding that the annuity from their superannuation funds are a meagre 5 to 5.4% per annum. Post tax, this may range from 3.5% to 4%, which is well below inflation. While interest rates may remain low for the next 1 or 2 years, the pension is fixed for life. Fixed deposit rates offered by banks are also at an all-time low.”
The higher taxation, according to Saxena, is on account of increase in income from retirement benefits like Leave Encashment and Gratuity which are taxed beyond a certain level. This doesn’t only increase the slab rate of the pensioners, but also makes them liable to pay the recently-introduced surcharge to meet the budget deficit. This again reduces the investable surplus in the hands of pensioners. Presumably, the Finance Minister did not intend to tax retirees, but this is what is happening. For most pensioners, the tax rates will go up by 10% to 25%.
“If you are retiring from a government employment, you are far more fortunate because your pension is based on your last-drawn salary and the number of years served and is not linked to the annuity rate. Not only this, it will keep on increasing every year in line with inflation and the commuted value will also revert back after 15 years. The leave encashment of government employees is also fully exempt from tax up to 300 days,” informs Saxena.
That is, however, not the case with the private sector employees.
Commenting on the woes of the retired persons and other taxpayers, income tax experts say that we have a graded system of taxation with the 30% tax rate being triggered at Rs 10 lakh income level. Further, individuals with over Rs 50 lakh of income are subject to surcharge at 10% which increases to 15% for taxpayers with income over Rs 1 crore, to 25% for income over Rs 2 crore and 37% for income over Rs 5 crore. “Hence the one-time payouts such as Gratuity, Leave Encashment etc, which exceed the tax exempt limits, could result in employees triggering higher rates of taxation with the disadvantage of the higher rate of surcharge being applicable on the entire income,” says Saraswathi Kasturirangan, Partner, Deloitte India.
The retirement benefits typically include Gratuity, PF and Pension, NPS, etc. Pension and gratuity workings are based on the years of completion of services/defined formulae. Hence, “the benefits per se will not undergo a change for individuals retiring during 2020. However, due to additional surcharge introduced in the FY 2019-20, such individuals may be subject to higher surcharge, resulting in lower post-tax benefits,” adds Kasturirangan.
It may be noted that gratuity paid in accordance with the Payment of Gratuity Act is exempt upto Rs 20 lakh, while Leave Encashment paid on retirement due to superannuation or otherwise is exempt upto a maximum of Rs 3 lakh. Pensioners and tax experts want the government to consider exempting such one-time payouts from being subject to surcharge or considering higher exemption limits. They are also hoping that the government will exempt the retiral benefits from the surcharge and also come up with a better scheme to offer a higher annuity.
True, like other taxpayers, retirees too can take the help of the existing provisions in the Income Tax Act to save on tax. However, that is not enough. For instance, under the I-T Act, specified deductions prescribed under chapter VI A is available upto a limit of Rs 150,000 in aggregate to claim the tax benefits, which help retiree to reduce the taxes. Deductions are also available for medical insurance payouts u/s 80D.
“Accordingly, an investment in specified tax-saving plans, donation, other permitted expenditure, Mediclaim payments, etc. could be claimed to avail the tax benefits. If the retiree has taken any housing loan on self-occupied property, the interest on such loan could be claimed exempt up to the specified limit under the Act. However, these are not significant deductions, and hence introduction of a lump sum deduction for investments made by tax payers out of the retirement benefits would be welcome,” suggets Kasturirangan.
It may be noted that the Pension Fund Regulatory and Development Authority (PFRDA) has also urged the government to make annuity or pension plans tax-efficient in the upcoming budget.
Moreover, industry experts suggest a dedicated pension or annuity scheme for senior citizens with tax-free pay-outs.
According to them, the uncommuted pension received by senior citizens is fully taxable. This includes the annuity from NPS or other pension schemes as well, where one needs to pay tax on annuity received on a monthly or yearly basis. Often, this results in senior citizens withdrawing annuity amounts in lump-sum to reduce the tax burden. However, such an action undoes the benefit of retirement planning and can adversely impact the quality of life in future.
Moreover, “there are no specific pension or superannuation schemes that are designed specifically for senior citizens. They typically park their investments and withdrawn annuities in Post Office Monthly Income Scheme (POMIS), Senior Citizen Saving Scheme (SCSS), and bank FDs that provide a monthly or quarterly interest pay-outs. The interest income earned from these is also fully taxable, and TDS is applicable if interest is more than Rs.50,000 per year. The drop in the returns from all these investments, especially in the last few years, means that senior citizens require a bigger corpus to receive the same returns. Therefore, a dedicated pension or annuity scheme for senior citizens that bundles similar returns with tax-free pay-outs can ensure that senior citizens have more cash at hand during their retirement,” says Adhil Shetty, CEO, BankBazaar.com.
MoS, Finance Anurag Thakur today said that Budget 2021 will be in accordance with people’s expectation.