Tax Benefits after Retirement
14 April 2016
Retired life begins with liquidation of retirement benefits such
as your Provident Fund, Gratuity, Superannuation fund, leave
encashment etc.
These benefits, built over decades of disciplined savings, will be
transferred into your bank account to help you enjoy the retired
life without any financial worries. However, ignoring your tax
liability on these benefits can lead to numerous legal and
financial complications. Hence, read ahead for an overview of
the tax rules applicable to the common retirement benefits.
Provident Fund
At the time of retirement, your Provident fund account will
consist of your contributions, the contributions of all your
employers, and the interest credited over the years. This entire
corpus is tax free provided the following conditions are fulfilled:
a. The PF account is either Statutory or Recognized or a
Public PF account.
b. You were in continuous service, either with one or
multiple employers, for a period of at least five years. If
you change jobs, then the PF account should be
transferred to the new employer. If this is done, then the
period of employment with the previous employer will be
included when computing the period of five years of
continuous service.
So, if you remain in service for at least five years for one or
different employers and have any PF account other than anunrecognized one, then the entire PF account corpus will be
exempt from tax when it is credited after your retirement.
To get an idea of the impact of the 2016 budget on tax
benefits offered on Provident Fund withdrawals, check out How
budget 2016 has affected your take home salary,
Gratuity
Gratuity, for tax exemption purposes, is calculated as a
Proportion of your monthly salary multiplied by the total years
of completed service. If you are covered under the Payment of
Gratuity Act, then the last drawn salary is used for the
calculation. If not covered, then the average salary based on
the last ten months of service will be considered, The
maximum amount exempt from tax is Rs. 10 lakhs.
If thebasic component of your monthly salary is Rs. 20,000 and
your total years of service is 25 years, then the amount of
gratuity exempt from tax will be calculated as below.
[Salary for 15 out of 26 working days Rs. 11,540 approx
[Total years of completed service l25 years
[Amount exempt from tax Rs. 2,88,500
Related: 64% Indians Fear Not Being Able To Achieve Their
Retirement Income Target
Superannuation
Any superannuation or pension policy obtained directly or
through the employer will mature at the time of your
retirement. The maturity amount is normally paid in the form
of a partial lump sum payment with the balance invested in
annuities for generating a fixed monthly or periodic income.
So, if the maturity amount is Rs. 1 crore, then you may get
around Rs. 30-40 lakhs as a lump sum payment with the
balance amount used to generate a fixed monthly income till
your death, The lump sum payment is called the commuted
pension. The amount invested in annuities is your uncommuted
pension.
1/3 of the commuted pension is exempt for those who have
received gratuity from their employers. For others, the
exemption limit is 50%.Income from the uncommuted pension
will be taxable at applicable rates.
New Pension Scheme account holders can claim exemption on
entire amount provided it is entirely used to purchase an
annuity for generating a fixed income,
Related:Is Retirement Planning Part Of Your Financial Goals In
2016?
Leave EncashmentEmployers permit retiring employees to encash a fixed number
of available paid leaves andholidays(Includes public as well as
organization-specific holidays).The exemption amount will be
either Rs. 3 lakhs or 10 months of leave encashment whichever
is lower.
So, if you have five months leave available at the time of
retirement and the ten months’ average of your salary is Rs.
50,000, then you can claim the lower of Rs. 2.5 lakhs (Rs.
50,000 x 5 months) or Rs. 3 lakhs i.e. Rs. 2.5 lakhs as exempt
from tax.
Being aware of the taxability of your retirement benefits will
ensure you can maximize savings and minimize legal and
financial complications when beginning your retired life.