After decades of hard work, retirement is the time to relax and tick off items on your post-retirement bucket list. And while you’re at it, you would naturally want to continue enjoying the perks you do now. Whether you want to buy a retirement house or travel the world, a proper retirement plan will help you achieve your goals conveniently.

But before making any elaborate plans, you must know that you will have to pay a tax on the pension income you will receive. As a result, your post-retirement income might not be as much as you were hoping for. If you want to receive your pension periodically, it will be fully taxable under the salaries head. But if you wish to receive it in a lump sum, it will be partially taxable for non-government employees and fully exempt for government employees. 

You need to pay a tax on pension income if your total income before deductions exceeds-

  • Rs.2.5 lakhs (for pensioners under 60 Years)
  • Rs. 3 lakhs (for pensioners between 60-80 Years)
  • Rs. 5 lakhs (for pensioners above 80 Years)

Be it NPS in 80CCD or the Pradhan Mantri Vaya Vandana Yojana; it is important to understand the deductions in income tax for senior citizens and pensioners so that tax burdens do not obstruct your retirement plans. Here are 5 tips on how you can reduce tax on pension income.

1. Standard Deduction

Under the Finance Act, 2018, both salaried employees and pensioners can claim a standard deduction of Rs. 50,000. To avail of this deduction, you do not need to submit any proof or documents. When you calculate tax on pension income, Section 16 of the Income Tax Act entitles you to claim a flat standard deduction of Rs. 50,000 p.a. or the actual pension received, whichever is less.

2. Deduction under Section 80CCD

While Section 80C is a favourite among investors for tax saving, Section 80CCD offers additional benefits, especially while calculating the income tax for senior citizens and pensioners. While calculating the tax on your pension, the taxable income can be reduced with investments under 80CCD. Section 80CCD enables you to claim an additional deduction of Rs. 50,000. Besides the National Pension Scheme (NPS), 80CCD allows you to invest in the Atal Pension Yojana Scheme. 

The Government of India launched both these schemes as an investment avenue for retirement planning. You can claim a deduction under Section 80CCD against your own contribution as well as the contribution of your employer. By investing in the APY or NPS, 80CCD helps you lower your tax liability while creating a retirement fund at the same time. You can claim a total deduction of Rs. 2,00,000 in a fiscal year under Section 80C and 80CCD.

3. Senior Citizen’s Saving Scheme (SCSS)

The Senior Citizen’s Saving Scheme is an investment instrument launched by the Government of India as a savings program for senior citizens. Retired citizens above 60 years, employees who have taken VRS within 55-60 years, or retired defence personnel over 50 years can avail of this scheme.

Under the SCSS, you can deposit a maximum of Rs. 15 lakhs for 5 years and can further extend it by three more years. The scheme has an interest rate of 7.4% p.a., which is taxable based on the eligible tax bracket. You can avail of the SCSS under Section 80C of the IT Act and reduce your pension income taxable by the Government.

4. Pradhan Mantri Vaya Vandana Yojana (PMVVY)

The Government of India launched the Pradhan Mantri Vaya Vandana Yojana as a retirement-cum-pension scheme for a tenor of 10 years. Under this scheme, senior citizens can choose to receive a regular pension based on their desired frequency. 

You can invest a minimum of Rs. 1.5 lakhs and a maximum of Rs. 15 lakhs at an interest rate of 7.4% p.a. You can further enjoy tax benefits under Section 80C. This helps you enjoy a regular pension, taxable only for the interest.

5. Public Provident Fund (PPF)

A PPF account is a long-term investment scheme. You can open a PPF account with a post office or any authorized bank. A PPF has a minimum tenure of 15 years, which you can extend in 5-year blocks. You can deposit a maximum of Rs. 1.5 lakhs in a fiscal year at an interest rate of 7.1%. 

By using PPF for pension, the taxable amount is reduced as both the interest and maturity amount are exempt under the Income Tax Act. While calculating the tax on pension income, you can claim PPF deductions under Section 80C.

Achieve your retirement goals with Tata Capital

A lack of proper retirement planning can affect your pension, taxable income, and your goals. From APY and NPS in 80CCD to retirement-focused schemes, the Government of India has launched several initiatives to reduce the burden of income tax for senior citizens and pensioners. With these investment avenues, you can reduce your pension income taxable as per the income slab rates. 

Don’t let your retirement plans take a back seat due to tax burdens. Calculate tax on pension income and invest your money wisely in debt-based safe instruments. You can also avail of a personal loan from Tata Capital to fund your post-retirement dreams. With a simple application process and affordable interest rates, you can fulfil all your retirement goals with Tata Capital.

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