Planning your taxes better to make your retired life better!
Retirement from your job doesn’t amount to retirement from taxation. Final tax is deducted at source at the time of retirement by the employer. However, it doesn’t mean the end of taxation in the life of a retired person. Income tax is payable on the basis of one’s income and not on the basis of employment. Below we will discuss the taxability before and after retirement in brief.
At the time of retirement, an employee gets PF, gratuity, lump sum pension and other retirement benefits. Taxability of above retirement benefits mainly depends upon whether employee is government employee or non-government employee. Amount received at the time of retirement by government employee in the form of PF, gratuity, lump sum pension is fully exempt from tax. But if person is not a government employee then the amount received from recognized provident fund is only exempted from tax. The other two i.e. lump sum pension amount and gratuity are partly exempted from tax as per provisions mentioned in Income Tax Act, 1961.
Employer deducts TDS from retirement benefits if they are taxable as per provisions of Income Tax Act, 1961. In that case, a retired employee is also not exempt from filling the returns. The retired employee has to show the amount received and taxes deducted in his income tax return in the year of receipt of retirement benefits. In most of the cases, the employee need not pay taxes on his retirement benefits if TDS has been deducted properly by the employer. But if the employee stands to receive any other income, in any form, then he has to file his tax returns by paying taxes on other additional incomes i.e. interest, pension or rent received.
It is always advisable to invest retirement amount in securities like FD, NSC and KVP which gives fixed rate of return on investment. Interest amount from these investments and pension received contribute to major source of income of a retired person. Income tax on these incomes is payable if interest amount, any other income and pension amount received during the year is above exemption limit specified in Income Tax Act. The best option is to make investments, from year to year, in tax saving FDs which offers not only income tax exemption but also fixed returns. If income of a retired person happens to be above the taxable limit, then it is always advisable to file voluntary Income tax return, reporting pension received, interests received or any other income received during the year by a person even after retirement.
Thus, we have been able to make it crystal clear that retirement from employment doesn’t mean retirement from taxation as normally a person might believe. Even post retirement, a person has to file his income tax return every year if his income from pension, interests or from any other source is chargeable under the Income Tax Act.
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