When it comes to investing retirement funds, the primary objective of any senior citizen is to earn regular income and safety of capital. Most senior citizens also think about the tax angle before making any investment decisions. A host of specific tax benefits are available to senior citizens by the government. As per the Income Tax Act, a person who has completed 60 years of age or above would qualify for various tax rebates available for the senior citizen category. Those who are above 80 years of age are considered as super senior citizens.
Higher exemption in the tax slab for senior citizens:
As per financial year 2016-17, a senior citizen enjoys a tax-free income up to Rs.3 lakh per annum. Similarly, a super senior citizen enjoys the basic tax exemption up to an income limit of Rs.5 lakh p.a.
Tax benefits for senior citizens:
Health insurance premium deduction under Sec/80D: Payment of medical insurance premium qualify for tax rebate under Sec/80D. A senior citizen can avail tax deduction up to Rs.30,000 for payment of health insurance premium compared to Rs.25,000 for individuals below 60 years.
Deduction for ailment of specified disease under Sec/80DDB: Medical expenses incurred for treatment of certain diseases qualify for tax rebate under Sec/80DDB. The specified health ailments include neurological diseases, malignant cancers, AIDS, Chronic Renal Failure, Haematological Disorders, etc. A senior citizen can avail up to Rs.60,000 deduction compared to Rs.40,000 available to individuals below 60 years. Further, a super senior citizen can get a tax benefit up to Rs.80,000 under this section.
Senior Citizen Saving Scheme (SCSS) under Sec/80C: While the tax saving options available for every individual also exists for senior citizens under Sec/80C, SCSS is a post office scheme meant only for senior citizens. Investment under this scheme qualifies for tax rebate up to the stipulated Rs.1.5 lakh under Sec/80C. An account can be opened in a post office or with a bank individually or jointly with spouse. There is a lock-in period of 5 years and the maximum investment limit is Rs.15 lakh. Presently, the interest rate is 8.5% per annum and it is payable quarterly in the SCSS account.
No tax on Reverse Mortgage: Reverse Mortgage is a loan which allows senior citizens to avail a regular income stream by mortgaging their residential property while still being able to occupy and reside in the house till they are alive or voluntarily decide to vacate the premises. The amount so paid as instalment to a senior citizen is fully exempted from tax.
Other reliefs:
No advance tax payment: A senior citizen may have various sources of income such as rental income, pension, interest from bank deposits, dividends, etc. He would be exempted from paying advance tax and would be required to pay self–assessment tax provided he does not have any business income.
No routine IT scrutiny: The routine income tax scrutiny does not include senior citizens in order to spare them unnecessary stress. Exceptions are only made in cases where there is actual credible information to warrant a tax scrutiny.
E-filing not mandatory for super senior citizens: As per Income Tax Act, any resident Indian earning Rs.5 lakh per annum and above is required to mandatory e-file his tax returns. However, this rule is relaxed for super senior citizens having income above Rs.5 lakh as they may not be tech savvy. They have the option of filing returns in paper mode.
Points to remember:
Filling up Form 15H: As per Income tax rules, if the combined interest income from fixed deposits, recurring deposits across all branches exceeds Rs.10,000 during a financial year, the bank will deduct TDS. If the total income of a senior citizen is below the basic exemption limit in a financial year, he should ensure to fill up Form 15H. It is a request to the bank for not deducting TDS on interest income. If a senior citizen forgets to fill up Form 15H, he would have to go through the hassle of seeking a refund of the TDS deducted in his tax returns.
Ensure continuity in filing tax returns: Many people stop filing returns after retirement as they do not fall under the taxable limit. While it is not mandatory to file tax returns, it is advisable for a senior citizen to maintain continuity in filing returns every year. This can be helpful in the future in cases where there is sudden windfall income, say from sale of property and may attract the possibility of a tax scrutiny. If a senior citizen needs to take a loan or is a co-borrower, he would be required to furnish his tax return records of previous 3 years to the bank. Filing returns regularly would also make things easy in getting a visa in the event of a foreign trip, although it is not mandatory.
For the younger tax payers:
How your senior citizen parents can help you save tax
Investing in parents name: Gifting money to parents as well as the income generated on investing it is tax exempt. Clubbing of income provisions do not apply here. Senior citizens enjoy a basic exemption limit of Rs.3 lakh p.a. and for super senior citizens (over 80 years) it is Rs.5 lakh p.a. If your parents are retired & do not have any high income, and you fall under the highest tax bracket, you can invest your surplus savings in their name and earn tax free income.
Claiming tax benefit on behalf of dependant parents: If your dependant parents are not claiming certain tax benefits, you can do so to reduce your taxable income. Besides claiming your premium of Rs.25,000, you can claim your parents health insurance premium of an additional Rs.30,000 under Sec/80D. If any of your parents have a specified ailment as mentioned earlier, you can claim medical costs incurred to the extent of Rs.60,000 in a financial year under Sec/80DDB. If your parents are above 80 years, you can claim tax deduction up to Rs.80,000. If any of your dependant parents suffer from a medical disability to the extent of 40 per cent as specified under Sec/80DD, you can claim any expenditure on medical treatment up to Rs.75,000 per annum. If any of your parent is severely disabled to the extent of 80 per cent, you can claim deduction up to Rs.1,25,000 per annum. You can also claim a deduction of Rs.5,000 for preventive health check-ups of dependant parents in a financial year.
Paying rent to parents and claiming HRA benefit: If you are residing in your parents property, you can pay rent to them and claim HRA deduction. For this purpose, it is important to complete all documentation related to HRA. Pay rent to your parents through cheque and maintain records of rent receipts for proof. Also, this will be rental income from house property for your parents and they will have to disclose the same while filing tax returns. This arrangement will be beneficial only if your parents fall under the nil/low tax bracket.
Channelising investments and broad basing your income in the names of your dependant parents will greatly help you to reduce your tax liability in a legal way.
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