Union Budget 2021 Expectations for Pensioners: The falling interest prices amid increasing inflation have created life hard for investors, particularly the retired who have to rely on pension earnings for survival. What is worse is that even the annuity or pension received is not tax-no cost, which is leaving senior citizens with restricted funds to meet their household requires. No wonder, with the Budget 2021 about the corner, senior citizens as effectively as these nearing retirement or who have retired lately want the government to make retirement positive aspects as effectively as pension plans tax-effective.
Take the case of Mr Anup Saxena (name changed), a senior executive who has retired lately. He does not only appear concerned about the falling interest prices, but greater taxes also. He believes the year 2020 was not only the most hard 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 greater taxation, according to Saxena, is on account of improve in earnings from retirement positive aspects like Leave Encashment and Gratuity which are taxed beyond a specific level. This does not only improve the slab price of the pensioners, but also tends to make them liable to spend the lately-introduced surcharge to meet the spending budget deficit. This once more reduces the investable surplus in the hands of pensioners. Presumably, the Finance Minister did not intend to tax retirees, but this is what is taking place. For most pensioners, the tax prices 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, nevertheless, not the case with the private sector workers.
Commenting on the woes of the retired persons and other taxpayers, earnings tax authorities say that we have a graded program of taxation with the 30% tax price becoming triggered at Rs 10 lakh earnings level. Further, men and women with more than Rs 50 lakh of earnings are topic to surcharge at 10% which increases to 15% for taxpayers with earnings more than Rs 1 crore, to 25% for earnings more than Rs 2 crore and 37% for earnings more than 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 positive aspects usually involve Gratuity, PF and Pension, NPS, and so forth. 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 possibly be noted that gratuity paid in accordance with the Payment of Gratuity Act is exempt upto Rs 20 lakh, when Leave Encashment paid on retirement due to superannuation or otherwise is exempt upto a maximum of Rs 3 lakh. Pensioners and tax authorities want the government to think about exempting such one-time payouts from becoming topic to surcharge or contemplating greater exemption limits. They are also hoping that the government will exempt the retiral positive aspects from the surcharge and also come up with a superior scheme to give a greater annuity.
True, like other taxpayers, retirees as well can take the assistance of the current provisions in the Income Tax Act to save on tax. However, that is not sufficient. For instance, below the I-T Act, specified deductions prescribed below chapter VI A is accessible upto a limit of Rs 150,000 in aggregate to claim the tax positive aspects, which assistance retiree to minimize the taxes. Deductions are also accessible for health-related insurance coverage 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 possibly be noted that the Pension Fund Regulatory and Development Authority (PFRDA) has also urged the government to make annuity or pension plans tax-effective in the upcoming spending budget.
Moreover, business authorities recommend a committed pension or annuity scheme for senior citizens with tax-no cost spend-outs.
According to them, the uncommuted pension received by senior citizens is totally taxable. This involves the annuity from NPS or other pension schemes as effectively, exactly where one requires to spend tax on annuity received on a month-to-month or yearly basis. Often, this benefits in senior citizens withdrawing annuity amounts in lump-sum to minimize the tax burden. However, such an action undoes the advantage of retirement organizing and can adversely influence the top 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.