Income tax for senior citizens: No salary after retirement? These 7 incomes can still attract tax; know what is exempt

Retirement may mean the end of your salary, but it does not mean the end of your tax liability. Pension, FD interest, rent, dividends, and capital gains can continue to generate taxable income even after you stop working.

Knowing what remains taxable and what is exempt can help retirees avoid unnecessary tax and reporting mistakes.

Retirement does not make all income tax-free

Many retirees assume that once salary income stops, their tax liability also reduces significantly or disappears. That is not always the case. Retirement changes the nature of income; it does not automatically make all income tax-free.

The taxability of a retiree's income depends on the nature of the receipt, its source, the retiree’s residential status, the tax regime opted for, and whether a specific

exemption or tax deduction is available under the Income-tax Act.

Also read: Can you get income tax notice for making digital payments through UPI, NEFT, RTGS, and IMPS? Know when it can be triggered

“Retirees should broadly classify their receipts into three categories: recurring taxable income, one-time retirement benefits that may be fully or partly exempt, and investment income earned after retirement. This classification helps in avoiding under-reporting as well as in planning taxes more efficiently,” says CA Hitesh Jain, Partner - Direct Tax, N.A Shah.

According to Jain, these are some of the key sources of income that remain taxable after retirement:

Uncommuted pension: Monthly pension is generally taxable as salary income in the hands of the retiree. A standard deduction may be available, depending on the applicable provisions and the tax regime chosen.

Interest income: Interest from savings accounts, fixed deposits, recurring deposits, post office deposits and the Senior Citizens’ Savings Scheme is taxable. Senior citizens opting for the old tax regime may claim deduction under Section 80TTB of the Income Tax Act, 1961 up to Rs 50,000 for qualifying interest income. However, under the new tax regime, such tax deduction is not available.

Rental income: Rent from let-out residential house property remains taxable after allowing the standard deduction of 30% and other permissible deductions such as eligible home loan interest, wherever applicable. Commercial properties which are given on rent also have a similar tax framework except for a few aspects.

Capital gains: Gains from sale of shares, mutual funds, immovable property or other capital assets are taxable based on the nature of asset, period of holding and applicable capital gains provisions. Retirees should be particularly careful about reporting the correct figure of sale in the ITR while redeeming mutual funds, switching schemes, selling listed shares or selling real estate, as these transactions are generally reported in the Annual Information Statement.

Annuity, insurance pension and dividends: Pension or annuity received from insurance companies is generally taxable in the year of receipt. Dividend income is also taxable in the hands of the shareholder.

These often-overlooked incomes can also be taxable

Retirees should also track interest accrued on cumulative fixed deposits, interest on income-tax refunds, family pension received by a spouse or legal heir, income from consultancy or part-time professional assignments, taxable withdrawals from certain investment products, gains arising on switch or redemption of mutual funds, and notional rental income where more than one house property is treated as self-occupied beyond what the law permits.

Also read: Planning to invest over Rs 10 lakh in fixed deposits? Here are 4 benefits of splitting your money across multiple FDs

Submission of Form 15H only prevents deduction of tax at source (TDS) from FD and other deposits where conditions are satisfied; it does not make the income exempt from tax. You can only submit Form 15H if your total income has nil tax liability, as it falls below the specified threshold. For example: Any income below Rs 12 lakh under the new tax regime and below Rs 5 lakh under the old tax regime is eligible to fill Form 15H. But you still need to file ITR even if your income has nil tax liability to claim enhanced Section 87A tax rebate.

Several retirement benefits are fully or partly tax-exempt

Not every amount received at retirement is taxable. Several retirement benefits are either fully or partly exempt, subject to prescribed conditions.

Gratuity: Gratuity received by central or state government employees is generally fully exempt. “For eligible non-government employees, the exemption is subject to a Rs 20 lakh limit and other conditions,” says Adhil Shetty, CEO, BankBazaar. Any amount exceeding the eligible exemption is taxable.

Leave encashment: Leave encashment received by Government employees at retirement is generally fully exempt.

For non-government employees, exemption depends on prescribed computation and the notified monetary ceiling. The exemption ceiling has been enhanced to ₹25 lakh with effect from 1 April 2023, subject to the applicable conditions and reduction for exemption already claimed in earlier years, explains Jain.

Commuted pension: Commuted pension, being the lump-sum portion of pension received upfront, is generally fully exempt for government employees.

For non-government employees, though, it is partly exempt: where gratuity is also received, one-third of the commuted pension is exempt; where gratuity is not received, one-half is exempt. Uncommuted pension, i.e., monthly pension, remains taxable, explains Jain.

PPF and NPS: PPF withdrawals are tax-exempt.

“Up to 60% of the NPS corpus withdrawn on exit is tax-free, while the annuity income is taxable. VRS compensation can qualify for exemption up to ₹5 lakh, subject to conditions,” says Shetty.

VRS received under a special scheme like the BSNL VRS 2019 scheme is tax-exempt. So, in case of VRS, if your age is below 60 years, then instead of Form 15H, you need to file Form 15G if your tax liability is nil and you don’t want the bank to deduct TDS.

How can retirees legally reduce their income tax liability?

The first step is to calculate total post-retirement income rather than looking at each investment separately. Retirees should compare the old and new tax regimes and make use of the deductions and exemptions available under the applicable regime.

“Under the old regime, senior citizens can claim up to Rs 50,000 deduction on eligible interest income under Section 80TTB of the Income Tax Act, 1961. They should also make use of applicable deductions for health insurance and medical expenses and plan capital-gain transactions carefully to utilise available exemptions,” says CA Abhishek Soni, CEO & Co-founder, Tax2win.

Fixed deposits and other interest-bearing instruments may be structured so that taxable interest does not get unnecessarily bunched in one year.

“Capital gains should be planned after considering the period of holding, available exemptions for reinvestment, set-off of capital losses and the tax impact of selling or switching mutual funds,” says Jain.

Also read: Are gifts given to NRIs by relatives taxable? Here's what you need to know about income tax and FEMA rules

Retirees should regularly reconcile bank interest certificates, pension certificates, capital gains statements, Form 26AS and the Annual Information Statement. Mismatches between information reported by financial institutions and the income disclosed in the ITR can lead to tax queries.

“Additionally, a retiree should maintain pension certificates, Form 16 or pension statements, interest certificates, rent records, capital gains reports, medical insurance proofs, exemption workings and AIS/Form 26AS reconciliation,” explains Jain.

Maintaining these records can help with accurate reporting, faster ITR filing and responding to any future tax queries.

The larger point is that retirement tax planning should begin before retirement, not when the first ITR after retirement is being filed, says Soni.

Understanding which benefits are exempt, which income remains taxable and how investments will generate taxable income over the years can make a significant difference to a retiree's overall financial security.