Retirement Planning: Follow these tips to save tax on pension income
Pension income for non-government employees is taxable. Hence, to maximise tax savings, one should invest in schemes such as Public Provident Fund (PPF), National Pension System (NPS) and Senior Citizens' Savings Scheme (SCSS), among others.
With efficient retirement planning, you can receive a good pension amount after superannuation from your service. It needs advance planning during your employment years to financially secure your future after retirement. Inflation and tax liabilities may adversely impact your pension income. It’s advisable to include tax saving investment instruments in your portfolio for building a corpus fund for retirement.
As per the existing income tax laws, the pension income is treated similar to salary and it will be taxed as per the applicable tax slab. Pension amount is tax free only when it’s received from a government body. For the private sector employees retirement planning should also include tax saving investments to maximise the return.
There are many tax saving investment options, particularly pension or annuity plans, which can reduce your tax liability on pension income.
Tips to save tax on pension income
Standard deduction: Pensioners can claim a standard deduction of Rs 50,000 per annum on their pension income like the salaried employees under the new tax regime. A deduction of up to Rs 15,000 is also allowed for family pensioners under the new tax regime. However, it’s important to note that if you choose the new tax regime other deductions or claims will not be allowed.
Section 80C deductions: The Section 80C of the Income Tax Act, 1961, provides several tax exemptions for pensioners who have invested in specific schemes or bonds, under the old tax regime. One can claim a tax deduction of Rs 1.5 lakh if they have invested in National Pension System (NPS), Public Provident Fund (PPF) and Senior Citizens' Savings Scheme (SCSS), among others.
Section 80DDB deduction: Under the Section 80DDB of the I-T Act, senior citizens can claim a deduction of up to Rs 1 lakh in case a dependent is diagnosed with specific diseases. In this section, it is noted that the tax deduction can be availed if the dependent (spouse, children, parents, or other dependent family member) is suffering from cancer, AIDS, neurological disability, renal failure or other illnesses mentioned in a list.
Section 80TTB exemption: A senior citizen earning interest from savings in a bank, post office, or cooperative society, is entitled to a tax deduction of up to Rs 50,000 in a year, according to the Section 80TTB of the I-T Act. Therefore, you can save a part of your pension income in these accounts to get a tax benefit and can earn substantial interest returns as well.
Section 80D deduction: Investing in a senior citizen health insurance policy will enable a tax benefit under the Section 80D of the IT Act. You will be entitled to claim tax exemption of up to Rs 50,000 per year on the premium paid for availing the benefits of the health insurance policy.
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