Income tax for dummies: When you are nearing retirement
When you are approaching retirement or have retired, your ability to generate income is compromised. You have to rely on assets created during your working life to meet expenses. At such a stage, you would hate having to bear unnecessary expenses. And income tax is one outgo you will be delighted to bring down. Let’s discuss some frequently asked questions (FAQs) most senior citizens or retirees have pertaining to tax treatment of post-retirement income, expenses and investments.
Question: My wife is undergoing medical treatment for cancer? Can I claim tax benefits for treatment expenses under Section 80DDB?
Answer: Yes, you can avail of tax benefits for expenses of cancer treatment (or other specified illness) for your wife (or for your parents, children and siblings). If your wife is a senior citizen (60 years and above), you can avail of deduction up to Rs 60,000 per financial year. If you wife is less than 60 years, the tax benefit shall be limited to Rs 40,000 per year. The benefit goes up to Rs 80,000, in case your wife is a very senior citizen (80 years or more) The tax benefit is related to age of the person getting the treatment.
You are required to produce prescription for such medical treatment from a specialist doctor. Additionally, if the treatment cost has already been reimbursed by a health insurance company or your employer, you cannot claim under Section 80DDB.
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Question: I recently made a donation for noble cause. Will I get tax benefits?
Answer: Yes, you can avail of tax benefits under Section 80G for specific donations. The extent of tax benefits under Section 80G depends on the fund and the institution.
For instance, entire donation to Prime Minister’s National Relief Fund can be claimed as deduction while only 50% of the donation to Prime Minister’s Drought Relief Fund is eligible for deduction. In some cases, the benefit is limited to 10% of gross total income. Several NGOs and charitable trusts have been granted permissions to accept donations under Section 80G. You can check the entire list on Income Tax Website.
Benefit for cash donation is limited to Rs 10,000 per financial year. In-kind contributions such as food, clothes and medicines are not eligible for deduction. Do ask for receipt of payment and photocopy of 80G certificate from the institution.
Question: Upon retirement, what are the benefits around senior citizen savings scheme?
Answer: Investment in Senior Citizens Savings Scheme (SCSS) is eligible for deduction under Section 80C of the Income Tax Act. SCSS account matures in 5 years but you have an option to extend the account by 3 years. You can open multiple accounts but total deposits under all the accounts cannot exceed Rs 15 lakh. The interest rate is notified every year by Ministry of Finance. The interest rate for FY2016 is 9.3% p.a., which is way higher than the fixed deposits currently available.
Once you open an account, the interest rate remains constant for the entire tenor of the deposit. The interest on SCSS deposits is taxable.
Question: I am a government employee, due to retire in 2 years. I expect a lump sum pension of Rs 20 lakh upon retirement and pension of Rs 2 lakh per annum after retirement, what are the tax implications?
Answer: Pension income of Rs 2 lakh per annum will be taxed as per your income tax slab. For commuted pension (Rs 20 lakh), the tax treatment depends on the nature of your employment. If you are a government employee, the entire Rs 20 lakh will be tax-free.
For other employees, it depends on whether you are receiving gratuity with pension. If you are receiving gratuity, the commuted pension will be exempt to the extent of one-third of the amount you would have received if the entire pension had been commuted. If you are not receiving gratuity, the exemption will be half the amount you would have received if the entire pension were commuted.
Question: Should I be switching to FD from my stock investments?
Answer: The question cannot be answered from taxation perspective alone. Beyond a doubt, equity investments are more tax efficient than fixed deposits. However, equities are more volatile too. You need to see if you can digest the risk associated with equity investments. Your ability to take risk goes down considerably once you retire. However, given the increase in life expectancy, you should not shun equity investments altogether. Take professional help if required to arrive at a prudent mix.