Income tax benefits for retired employees under Indian Income Tax Act
1. Higher Basic Exemption Limit: –
Out of numerous income tax benefits available for the retired employees, first and foremost benefit is the basic tax exemption limit. For ordinary individual taxpayers, the basic exemption limit, up to which he is not required to pay any tax is presently fixed at Rs 2,50,000/- for AY 2022-23. However, for retired employees who are also Senior Citizen between 60 and 80 years of age, the basic exemption limit is fixed at a higher figure of Rs 3,00,000/-. For Super senior citizens who are 80 years and above of age, the exemption limit is set at Rs 5,00,000/-.
2. Standard deduction of Rs 50,000/- from pension income: –
From A.Y. 2020-21, a standard deduction up to Rs 50,000/- against salary income earned during the year has been introduced u/s 16 of Income Tax Act, 1961.
A retired employee above 60 years of age who is in receipt of pension income from his former employer can claim a deduction up to Rs 50,000/- against such pension income.
3. Exemption from payment of advance tax: –
Every person whose estimated tax liability for the year is Rs 10,000/- or more, is liable to pay advance tax. However, a retired employee above 60 years of age need not pay any advance tax, provided he does not have any income under the head “Profits and Gains of Business or Profession”.
4. Gratuity received on retirement: –
Under section 10(10) of the Income Tax Act, 1961, the gratuity received on retirement is exempt under following conditions: –
(i) Any death cum retirement gratuity received under the revised Pension Rules of the Central Government or Central Civil Service Pension Rules 1972.
(ii) Any gratuity received under the Payment of Gratuity Act, 1972 to the extent does not exceed an amount calculated u/s 4(2) and 4(3) of that Act.
(iii) Any other gratuity received by an employee on retirement or on termination of his employment or received by his widow, children or dependents on his death to the extent provided therein.
5. Amount received on Commutation of Pension: –
Under Section 10(10A) of the Income Tax Act, 1961, the amount received on Commutation of Pension is exempt under following conditions: –
(i) Any payment in commutation of pension received under the Civil Pension (Commutation) Rules of Central Government or under any similar scheme.
(ii) Any payment in commutation of pension received under any scheme of any other employer to the extent provided in the Income Tax Act, 1961.
(iii) Any payment in commutation of pension received from a fund under clause 23AAB i.e., Fund set up by LIC on or after 01st August 1966.
6. Tax on family pension: –
Family pension is taxed under the head “Income from other sources”. Family pension paid as regular monthly income (uncommuted pension) by the employer to a family member of an employee in the event of his/her death. Family pension is taxable after allowing a deduction of 33.33% or Rs 15,000/-, whichever is less in the income tax return of the family member receiving the pension. However, exemption is available for pension from UNO and for kids of Armed Forces in the event of death in operation duties.
7. Leave Encashment on retirement: –
Under section 10(10AA) of the Income Tax Act, 1961, amount received on leave encashment is exempt under following conditions:
(i) Any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement (whether) on superannuation or otherwise.
(ii) Any such payment (as given in para (i) above) received by an employee other than employee of Central or State Government in respect of so much of period of earned leave as does not exceed 10 months calculated on the basis of average salary drawn by the employee during the period of 10 months immediately preceding his retirement and subject to other limits laid down in the Act for quantum of earned leave and in respect of receipts from different employers.
8. Amount received from a Superannuation Fund: –
Under Section 10(13) of the Income Tax Act, 1961, the amount received from an approved Superannuation Fund is exempt from tax subject to certain conditions.
9. Deduction of Medical Insurance Premium and Medical Expenditure: –
From AY 2020-21, the maximum limit for deduction u/s 80D in respect of payment made for health insurance premium in respect of a retired employee above 60 years of age has been allowed at Rs 50,000/-
Deduction up to Rs 50,000/- is also allowed for medical expenses incurred on the health of a Senior Citizen provided no amount is paid for health insurance of such person. For claiming this deduction, it is mandatory that the health insurance premium / medical expenses are paid by any mode other than cash.
10. Amount received from a Provident Fund: –
Under Section 10(11) and 10(12) of the Income Tax Act, 1961, the amount received from a Provident Fund is exempt from tax (when the Provident Funds Act, 1925 applies or payment is from any other provident fund set up by the Central Government and notified by it on this behalf in Official Gazette). Also, the accumulated balance due and becoming payable to an employee participating in a recognized provident fund to the exempt provided in rule 8 of part A of 4th Schedule.
11. Deduction is respect of Medical Treatment: –
In case you have paid any amount during the financial year 2018-19 or after that period for medical treatment of specified disease or ailment and you are a senior citizen, you can claim as deduction an amount of Rs 1,00,000/- from your income under section 80DDB of the Income Tax Act, 1961.
12. Interest earned from bank and post office deposits: –
Individual taxpayer other than senior citizens are allowed maximum deduction of Rs 10,000/- under section 80TTA in respect of interest income from saving bank accounts. However, from AY 2019-20 onwards, a retired employee above 60 years of age can claim deduction up to Rs 50,000/- under section 80TTB in respect of interest income earned on not only savings bank accounts but also on interest income earned on any bank deposits or any deposit with post office or cooperative banks.
Further, if such interest income earned by him during the year is less than Rs 50,000, the payer bank/post office will not deduct any tax from such interest income. However, if the deposit is held for/by/on behalf of any firm / AOP / BOI, the member / partner cannot avail this benefit, even if senior citizen.
13. Transfer of Capital Asset under Reverse Mortgage Scheme: –
Section 47(xvi) and 10(43) of the Income Tax Act, 1961
The transfer of a residential house property by way of a reverse mortgage as per the Reverse Mortgage Scheme made and notified by the Central Government for senior citizens, is not liable to be taxed as capital gain, nor the loan amount received taxable under any other had of Income.
14. File Income Tax Return Manually: –
A very senior citizen aged 80 years or more eligible and filing his return of Income in form SAHAJ(ITR-1) or SUGAM (ITR-4) us not mandatory. However, he may opt for e-filing, if he chooses to do so.
15. Exemption from filing of Income Tax Return (ITR): –
Section 194P of Income Tax Act, 1961
From AY 2022-23, in case of senior citizens of the age of 75 years or above having only pension income and interest income only from the account(s) maintained with a bank in which thy receive such pension, such senior citizen shall not be required to file their ITRs. The specified bank shall be responsible for computing their total income and deducting tax thereon after giving effect to various deductions allowable under Chapter VI-A and rebate u/s 87A of th Act.
16. Amount received under Voluntary Retirement Scheme: –
For employees receiving amounts under voluntary retirement scheme, the exemption is given of Rs 5,00,000/- under section 10(10C) of the Income Tax Act. However, the scheme should be drawn as per the rules prescribed therein and is limited to the employees of the organizations given in the stated sub-section. The gratuity, provident fund and earned leave encashment are subject to the same conditions as already discussed earlier.
***
