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Nil tax liability is most desired post retirement. For this,it is important to know the impact of tax on retiral proceeds,received from various sources.
For the salaried class,the government provident fund,employee provident fund,gratuity,leave encashment and pension are primary retirement benefits. A voluntary retirement scheme payment may add to the above list for a few. Life insurance policies,annuity plans,public provident fund,unit linked insurance plans and equity linked savings schemes are some other sources of retirement funds.
In absence of any government-sponsored universal social security scheme in India,it is important that the available retirement benefits are optimised from return on investment and tax impact perspectives. While the return on investment may be a variable dependent on various factors,tax impact should be evaluated carefully,especially considering the changes in the tax law.
A revised discussion paper on DTC was introduced in June. It has restored the EEE regime for GPF,PPF,other recognised provident funds,pension schemes administered by the PFRDA,approved pure life insurance products and approved annuity schemes. Investments made in other instruments (Ulips,ELSS etc) prior to the DTC coming into effect would enjoy the EEE method of taxation for full duration of the instruments. Any investments post the introduction may have a tax impact on maturity.
The DTC had proposed that payments to employees post retirement would be exempt from tax only if invested in retirement benefit accounts maintained with certain permitted savings intermediaries. On withdrawal from RBA with the PSI,tax would be payable on the amount withdrawn. However,in the revised discussion paper on the DTC,the government has rolled back the RBA scheme,but has restored the tax treatment (EEE) for these benefits subject to specified limits. Further,under the current tax law,the government has recently increased the tax exemption limit for gratuity from Rs 3,50,000 to Rs 10,00,000.
Also,steps have been taken to set up and popularise the new pension scheme. While it started with some ambiguity on the tax treatment at the time of withdrawals,it is now proposed to exempt the proceeds withdrawn on maturity. This brings NPS taxability on par with other long-term retiral benefits.
The writer is partner,Tax and Regulatory,BSR and Co
