How to Save Taxes on Retirement Income?

1. Calculate Your Gross Taxable Income

After retirement, even though you stop getting the monthly salary, the government can levy income tax on your yearly income from different instruments. These include rents from your residential and/or commercial properties, interest from investments and capital gains. 

You need to calculate all your income from these taxable sources. After this, you can understand whether all your accumulated income makes you liable to pay taxes and can make necessary strategies for retirement tax saving.

2. Know Which Incomes and Expenses Are Allowed for Deductions

Under different Sections of the Income Tax Act of India, there are certain incomes on which you can get tax benefits. Some exempted incomes can be from house rent allowance, awards and scholarships, provident funds, reimbursements, leave travel concession, remunerations paid to diplomats, government allowances, death benefits of life insurance plans, amounts received owing to acceptance of voluntary retirement schemes, etc.

If you have received this financial assistance, you do not need to include them within your gross annual income to save tax on retirement income.

3. Choose Instruments of Tax Deductions

You can also find several investment instruments that can help you reduce your net taxable income. These include Equity-Linked Savings Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plan (ULIP), Sukanya Samriddhi Yojana (SSY), Senior Citizen Savings Scheme (SCSS), etc. 

Under Section 80C, you can reduce your net taxable income by up to ₹1.5 Lakh by investing in these schemes. Besides this, there are different other sections under which you can reduce your tax obligations.

To know how to save tax on retirement income, you must be aware of different Sections of the Income Tax of India that offer tax deduction benefits for senior citizens. You have already known about the benefit of tax deductions in Section 80C. Besides this, you can also enjoy tax benefits under the following sections:

• Section 16: Standard deduction is the answer if you are still clueless about how to save tax on retirement income. According to Section 16 of the Income Tax Act of India, you can get a tax deduction benefit of ₹50,000 or the total pension amount received in a financial year, whichever is lower. This will help you reduce your tax burden to a large extent.
• Section 80TTB: This section allows you to get tax benefits on the interest earned from your deposits in the savings account of the post office, banks and cooperative society. According to this Section, you can reduce up to ₹50,000 from your gross taxable income. 
• Section 80DDB: Section 80DDB provides tax deductions on expenses incurred while treating certain ailments. These include cancer, AIDS, haemophilia, dementia, etc. Senior citizens can reduce their taxable income by up to ₹1 lakh and non-senior citizens by up to ₹40,000. They can also claim tax deductions under this section for the treatment of their dependent family members.
• Section 80D: If your age after retirement is above 60, you can get tax benefits for up to ₹50,000 on your total health insurance premium paid in a financial year. If you are a non-senior individual, the maximum tax benefit limit is ₹25,000.

Nevertheless, the tax obligations on a pension depend on whether you take the amount in instalments, known as 'non-commuted' pension, or you get all the amount at once, known as 'commuted' pension.

In the case of a non-commuted pension, you will have to pay the income tax according to standard provisions. On the other hand, if you get a commuted pension, you will have to pay tax on the 50% of the pension amount, given that it includes gratuity. In case it does not have gratuity, you will have to pay income tax on 1/3rd of your pension. However, government employees will not have to pay income tax on their commuted pension.

Now that you know how to save tax on retirement income and which Sections of the Income Tax Act let you reduce your tax obligations, you can easily reduce your financial burden to a large extent. This will help you with your annual savings.