Pension by HA TAX

Pension

Jun 10, 2022

Retirement planning basically focuses on the financial planning aspect like pension, which is important when one stops working. Retirement planning should start as soon as one draws the first salary. But inflation has a bad effect on the investment always as it erodes the value of money. One must plan for financial investment in financial instruments and other profit-making instruments as it offers returns above the inflation which in turn helps ones to enhance the quality of life.

Planning means estimating expenses and assessing risk- appetite and tax efficiency. 

As life expectancy is on the rising trend, one generally depends upon one’s children and relatives for money (in case one doesn’t invest in one’s retirement). It is highly recommended that one should increase one’s investment when one gets a hike in salary and also not use the money for any other purpose but plan to enjoy its compounding benefits of it. 

Pension

Under the salary head, while filing an income tax return, a pension is taxable. Pension is paid every month or periodically however, one can choose to receive a pension as a lump sum (which is also called a Commuted Pension) also. 

  1. Commuted and Uncommuted Pension:

The employer and taxpayer contributions to the annuity fund which pays the pension out of the fund. One may also choose options to receive a certain percentage of pension in advance. For example, at the age of 60 years, you decide to receive 10% of your monthly pension in advance for the next 10 years worth Rs 10,000. This will be paid to you as a lump sum. Therefore, 10% of Rs 10000x12x10 = Rs 1,20,000 is your commuted pension. You will continue to receive Rs 9,000 (your uncommuted pension) for the next 10 years until you are 70 and post 70 years of age, you will be paid your full pension of Rs 10,000.

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    1. Taxability of Commuted and Uncommuted Pension:

    Period pension and uncommuted pension are taxable. In the above case, Rs 9,000 received by you is fully taxable. Rs 10,000, starting at the age of 70 years, is fully taxable as well.

    Pension received will be exempt in some instances:

    • Non-Government may take partially exempt
    • The government takes the full exemption

    If gratuity is received along with pension, 1/3rd of the amount of the pension would be received. If 100% of the pension is commuted it is exempted from commuted pension and the remaining is taxed. In this case, if the only pension is received and gratuity is not received only ½ amount of the pension would be received (in case, 100% of the pension is commuted it is exempt).

     

    1. Reportable pension income in ITR

    Under the Salary Schedule, one has to choose ‘Pensioners’ under the field ‘Nature of Employment’. Name, Address, Tax Collection Account Number (TAN) and Tax Deduction (TDS) have to be mentioned under ‘Salary’ in Pension income. On the pension amount, a specific limit is exempted from Income Tax and be reported as ‘Commuted Pension’ and the excess amount will be reported as ‘Annuity Pension’ under the Salary (in Section 17(1) of the Income Tax Act 1961).

    The commuted pension, exempt from taxes, must be entered in the field ‘Any Other’ under the ‘Nature of Exempt Income’. And mention details in ‘Description’ and the amount of commuted pension.

     

    1. The amount received by a family member

    Pension which is received by any family member is taxed under the head’s income from other sources in an income tax return. If the pension is commuted or made in a lump sum then it is not taxed. Whereas uncommuted pension which is received by family members is exempt from Rs. 15000 (or, 1/3rd of the amount). (whichever is less is exempt from tax).

    For example – If a family member receives a pension of Rs 1,00,000, the exemption available is least of – Rs 15,000 or Rs 33,333 (1/3rd of Rs 1,00,000).

    Thus, the taxable family pension will be Rs.85,000 (Rs 1,00,000 – Rs 15,000)

     

    1. The amount that is received from UNO

    Employees or employee family members who receive a pension from UNO or from the armed forces are exempt from paying tax.

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      Atal Pension Yojana

      It is a pension scheme which mainly aims to target an unorganised sector such as delivery boys, maids, gardeners etc. This scheme is the revised version of the Swavalamban Yojana.

      The goal of this scheme is to ensure that no Indian Citizen has to worry about illness, disease or accident in an old age which provides a sense of security. The private sector employees who are working in an organisation do not provide them pension benefits.

      When one attains the age of 60 one gets an option to get a fixed pension of Rs. 1000/ 2000/3000/4000 /5000. Also, the pension is determined based on the age of an individual and the amount which is contributed by one. Upon the death of the contributor, his spouse can claim a pension. In case the contributor dies before 60 years of age, the spouse is given an option to claim the amount or continue with the scheme (for the balanced period). The amount which is collected is managed by the Pension Funds Regulatory Authority of India (“PFEDA”) an investment pattern which is laid down by the Government of India.

      The Government also makes a co-contribution of 50% (of the total contribution)/ Rs. 1000 per annum (whichever is lower). This is for all the eligible subscribers who have joined in-between June 2015-December 2015 for a 5 year period from 2015-16 to 2019-20 financial years. Given the condition that the subscribers are not part of any other statutory social security schemes such as an employee’s provident fund, or one who is not paying income taxes to avail Government’s co-contribution.

      Eligibility for Atal Pension Yojana

      Some of the requirements which have to be fulfilled are:

      • An individual should be a citizen of India
      • The age of an individual should be between 18-40 years.
      • One should make a contribution for a minimum of 20 years.
      • One must have a bank account linked with an Aadhar card.
      • One must have a working mobile number

      One who is already enrolled in Swavalamban Yojana will be migrated to Atal Pension Yojana automatically.

      With the following steps, one can apply to the scheme-

      • One has to visit the bank to open an APY account. (Note: All nationalized banks provide)

      (From the official website one has to download the form)

      • Fill out the application form and submit it to one’s bank.
      • Submit a photocopy of the Aadhaar Card.

      (Note: A confirmation message will be sent to the registered mobile number)

      Monthly Contributions

      It depends upon the amount which one want to receive and the age from which one has to start contributing. The table below

      The following table tells you how much you need to contribute per annum based on your age and pension plan.

      Insert the table from this link

      Some of the important aspects of APY are:

      1. The amount will be debited automatically periodically from the account (for that one has to make sure that one has a sufficient balance in one’s account).
      2. One can increase the premium at one’s will (for that one has to visit the bank account and talk to the manager about it)
      3. The penalty is levied (Rs. 1/ month for every Rs. 100) in case one has default payment. If one has default payment for 6 months one’s account will be locked up and for 12 months one account will be closed.
      4. In case of death or terminal illness, early withdrawal is allowed
      5. If one chooses to close the scheme before the age of 60 (contribution + interest will be returned). But one is not eligible to receive a Government contribution/ interest earned on that amount.
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      Investment Options for Pensioners

      An Ideal Portfolio

      Investors always expect to get a regular income as well as plan for retirement. In case one is a pensioner (or one who gets a regular source of income) one doesn’t need to focus on the first benefits.

      One should direct one’s portfolio such that it grows over time, that is, it is a profitable investment. Individuals who are self-employed and don’t receive any form of pension should always plan to direct investment towards profit-making & a source of regular income provider.

      It is important that one should always plan wisely before investing.

      Investment Options for Regular Monthly Income

      Some of the best investment options which senior citizens, as well as pensioners, can opt for are as follows:

      • Recurring Deposits and Fixed Deposits

      Financial instruments such as Fixed Deposits and Recurring Deposits are one of the most common types of investment which retired individual prefers. This is because one gets a higher interest rate for it. Additionally, Rs. 50,000 interest income is completely made tax-free under Section 80TTB of the Income Tax Act.

      Apart from it, one can also plan to invest in Post Office Monthly Scheme (POMIS) and avail tax-benefit up to Rs. 1.5 Lakhs for a maturity period of 5 years.

      • Pradhan Mantri Vaya Vandana Yojana

      This scheme is operated by Life Insurance Corporation (LIC), which is a low-risk investment pension plan. The tenure of this scheme is 10 years with an interest rate of 7.4%. However, the senior citizens (who are above 60 years) are eligible to plan on making a lump-sum investment.

      The pension which is received ranges from Rs. 1000 – Rs. 10000 per month. A minimum investment of Rs. 1.56 Lakhs and a maximum of Rs. 15 Lakhs are needed to avail of this scheme. However, the scheme is modified and extended up to 31st March 2023. One should also take care that investment made in this scheme is not used for a tax deduction (under Section 80C). The interest rate is proportional to the Senior Citizen Savings Scheme (SCSS). The best aspect of this scheme is that it is exempted from Goods and Service Tax (GST)

      • Senior Citizen Savings Scheme (SCSS)

      As mentioned earlier SCSS is another investment option available for a senior citizen who is looking for long-term saving schemes. It offers security and benefits to individuals.

      One can easily avail of this scheme from post-office or any recognized bank across the country. As this scheme comes under Section 80C of the Income Tax Act (1961) individual gets tax benefits up to Rs. 1.5 Lakh per year and a high rate of interest. With a maturity of 5 years, one can get an additional extension of 3 years. The maximum amount which one can invest in this scheme is Rs. 15 Lakhs.

      Investment Options for Growth

      Some of the inflation-beating return options which senior citizens can enjoy are-

      1. Mutual Funds (MF)

      Investing in Mutual funds is indeed the best option to get in inflation-beating returns and save on tax. It is considered to be one of the best investment options.

      Investing in a mutual fund scheme like ELSS which comes under Section 80C, tax deduction up to Rs. 1.5 Lakh/ year can be taken.

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      1. National Pension System (NPS)

      It is a scheme which can be availed by individuals who are in the age group of 18-65 years. One can also take an extension of 5 years after 65 years.

      Under Section 80 C and Section 80CCD of Income Tax Return deduction up to Rs. 1.50 Lakh and additional tax benefit up to Rs. 50,000 per year can be availed respectively.

      The investment made in this can be directed in equity, corporate and government securities which depends upon the individual choice of the investment process. Otherwise one can also choose for allocation of investment depending upon one’s age. Although this scheme doesn’t give a steady interest income no doubt one can rapidly grows one’s income. (Note: The maximum investment in equity is 75%).

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