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Retirement Benefits in Indian Tax System

Income tax incidence is a major factor that affects the financial aspects of retirement planning. Financial security and stability is a chief concern post retirement, and the income taxes have a major impact on these aspects. Fortunately, the government and authorities have provided for a number of provisions that provide a wide range of retirement benefits.

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All men (and women, of course) are created equal – but their retirement benefits may vary, depending on a host of factors. For example, only a miniscule proportion is working in the organized sector, which provides access to various formal retirement benefits instituted by the government. The unorganized sector, which constitutes the major proportion of Indian worker population, has to depend on voluntary savings schemes such as the PPF or the newly introduced National Pension Scheme. There is a still weaker section that has to depend on the welfare and social assistance schemes provided by the government.

In this scenario, the question of retirement benefits in the Indian Tax system affects a very small proportion of the Indian population. Now, let us consider the profile of an average retired person to assess the various retirement benefits available.

For All Persons (Self Employed or Salaried)

In most of these cases, it would not be proper to call any benefits ensuing as “retirement” benefits, since they are not available on retirement per se, but on the achievement of a certain age, that is 65 years. I have assumed that a 65 year old person would fulfill the definition of retired – though there may be exceptions. Also, it is difficult to pinpoint retirement in case of self-employed individuals.

The income tax benefit available to persons above 65 years of age is in respect of the exempt income, which is Rs 2,40,000. It is Rs 1,60,000 for men, and Rs 1,90,000 for women. The tax slabs applicable to senior citizens (for the financial year 2009-10) are as as follows -

Income Tax Slab (in Rs.) Tax Rate Applicable

0 to 2,40,000                                         Nil

2,40,001 to 3,00,000                             10%

3,00,001 to 5,00,000                              20%

Above 5,00,000                                     30%

However, the 2010 Annual Budget has bough some additional reason for cheer, as the tax rate have been modified. For senior citizens, the tax slabs (applicable fro FY 2010-11) would be -

Income Tax Slab (in Rs.) Tax Rate Applicable

0 to 2,40,000                                         Nil

2,40,001 to 5,00,000                             10%

5,00,001 to 8,00,000                              20%

Above 8,00,000                                     30%

If these rates are combined with the provisions of Sections 80 C (where the deductible amount has been raised from Rs 1,00,000 to Rs 1, 20,000), the provisions seem to be quite beneficial for senior citizens. Clearly, these changes are sure to benefit the senior citizens – at least those who have an income level high enough to avail these benefits.

Example

Let us consider the case of Mr X, who is an Indian resident aged 66 years, and having an annual income of Rs 6,00,000 from various sources.

For FY 2009-10, his tax liability would be

Annual Income -  Rs 6,00,000

Less                  -  Rs 1,00,000 (Deduction allowed u/s 80C)

= Rs 5,00,000

Thus, Mr X would fall in the tax bracket of Rs 3,00,000 to Rs 5,00,000, and his tax liability will be -

(60,000 x 10% ) + (2,00,000 x 20%) = 6,000 + 40,000

= Rs 46,000.

For FY 2010-11, his tax liability would be

Annual Income -  Rs 6,00,000

Less                  -  Rs 1,20,000 (Revised Deduction allowed u/s 80C)

= Rs 4,80,000

Thus, Mr X would fall in the tax bracket of Rs 2,40,000 to Rs 5,00,000, with an applicable rate of 10%, and his tax liability will be -

2,40,000 x 10%

= Rs 24,000.

Thus, we find that the tax burden on Mr X has halved. Of course, he had to invest an extra Rs 20,000 to get the full benefit, but still, he is richer by Rs 2,000!

(We have assumed no other tax deduction, such as that available for housing loans etc)

For Salaried Individuals

The above benefits are available to all persons, whether they are self employed or salaried at the time of employment. Or to put it more accurately – their income is under the heads salary or any other head. The salaried individuals benefit from the following additional provisions -

Provident Fund Withdrawals – The amount withdrawn from the Employees Provident Fund is exempt from Income Tax.

Payment of Gratuity – The law provides for an exemption of any payment as gratuity up to an amount of RS 3.5 lakhs. There is a proposal pending with the government to raise this limit to Rs 10 lakhs.



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