I got the following question from a reader the other day, and I’m seeing if I can crowd source the answer and verify some things that I think are applicable in this case.
Here is the question:
I am an avid reader of your blog. I am working in a leading software firm.
I have a question. I will be superannuating next year after completing 55 years as per our company policy. I should have a retirement corpus of around 50 lacs which includes my savings in LIC plus the retirement benefits like PF, superannuation and gratuity. I do not have any loan liability. Assuming that I keep this money in bank FDs, thus earning approx. Rs.4.5 lacs as interest at the rate of 9% p.a. I request your answer to the following questions:1. What will be my tax liability with the above income?
2. Since there will be no salary income, should I, as a tax payer, intimate the Tax Authorities about my retirement or will my employer do this? (my case is not a resignation but a superannuation). If so, pl. suggest me the website where any particular format is avaiable.
3. My income will be within Rs.5 lacs p.a., – should I file a tax return?
4. Is keeping the entire funds in bank FDs safe?I would appreciate your response to do my financial planning.
First of all, I’m not sure what the tax treatment is for the lump-sum that you get on retirement. I’d imagine it depends on the source, but even then I don’t know how to break it up into different categories.
Now, to the responses to the questions.
1. At 4.5 lakhs, you will fall under the Rs. 2 to 5 lakhs tax bracket and you will be liable to pay 10% tax on the income above 2 lakhs. There are tax deductions you can get to reduce your tax liability but if you don’t do anything then you will have to pay taxes.
2. Even though you don’t have a salary income, you have income from other sources, and you will have to file tax returns.
3. Yes, because of the reasons stated above.
4. Well, this is a bit harder to answer, I think in general the big banks are safe and as long as you spread your fixed deposits in a few different banks you should be alright. However, if there were a problem with any banks, I think the general public will be the last to know and I certainly don’t have any insights on any problem banks.
What do you think about this situation? Anything you want to add or correct?
Everything said by all is correct except taxability on the lump sump you will get on the retirement.
Superannuation: Taxable in the year of receipt (deduction upto 1/3rd)
PF: Taxfree
LIC : Taxfree
Gratuity: Taxfree only if govt employee else conditions apply.
Inflation!
Manikaran Singal is correct
1. Lumpsum amounts recieved from LIC (provided it is insurance plan and no pension policy) , PF , Gratuity will be tax free. And whatever interest income you generate by investing that amount in bank FD will be 100% taxable and taxed as per the slab you fall in. Like as in your case it would be in 10% slab.
2. There’s no need to inform the tax authorities. It hardly matters whether you are employed or retired. You just need to pay the right taxes on your taxable income.
3.Yes you have to file tax returns. The exemption of not filing returns below 5 lakh income applies to employees who don’t have any other income besides salary, as it is expected that there employer will file the return and provide them with form 16.
4. Yes, you may call it safe. But theoretically its not as the guarantee on the deposit is just Rs 1 lakh. Moreover there’s one more risk applicable to the bank deposit or safe deposit is the risk of inflation which you are not considering at all. Its better diversify your savings to different instruments like Bank Fd, SCSS etc. you may also take some exposure to debt Mutual funds and Monthly Income Plans to optimize the returns and make the returns more tax efficient.
1.Seeing the list of sources,i believe there is no tax liability on the income received
2.It is not necessary .
3.Already answered by Manshu
4.Rs 15 Lacs(maximum) can be invested in Senior Citizen savings Scheme which provides you right now with 9.3% interest.There is also IT deduction up to Rs 1 Lakh.Pl.do a google search for more details.This is very safe as it is a Govt. of India scheme.
SCSS is nice option but I think need to attain age of 60 Years.
Deposits in the bank like IDBI – 9.25%, Bank Of India – 9% , Bank Of Baroda – 9% are few good options.
Some Allocation in selected Debt funds is also a good option.
On the tax, yes, you will have to pay 10% on the income above 2 lakh rupees. Two things you need to consider here. 1) do you have other ncome (rental, existing FDs etc). This may take income beyond Rs 5 lakh. For this income above 5 lakh, you have to pay 20% tax. 2) You can invest in some tax saving instruments like PPF and reduce the taxable income. (don’t create a new PPF as it will have long lock-in period).
Other thing to note with FD is that bank will deduct 10% TDS. So, if you do not inform bank, they will deduct Rs 45,000 on the 4.5 lakh interest. So, give form 15G or 15H so that they do not deduct this amount. In the end you can pay Rs 25,000 or so as tax. (or better still to inform only few banks so that TDS of only 20,000 or 25,000 is deducted).