Tax Planning for retired personnel
Chintan
(Querist) 25 November 2009
This query is : Resolved
A person retired from government job in the year 2008-09. He received salary arrears from January 2006 to September 2008 in the year 2009-10. This additional salary which he has received is taxable in A.Y. 2010-11. suggest,How can he plan the funds to reduce tax liabilities. Where can he invest to get maximum tax benefit.
Raj Kumar Makkad
(Expert) 25 November 2009
The whole amount received of arrears of salary at the time of retirement is not taxable for the present year rather the same shall be allocated in the relevant years of payment and accordingly tax liability shall be calculated.
It is better to invest in Govt. bonds, post office, insurance sector wherein still maximum tax benefits are available.
A V Vishal
(Expert) 25 November 2009
There is no scheme to invest the arrears of salary in the current year in order to reduce tax. If salary is received in arrears it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.
Vineet
(Expert) 26 November 2009
Agree with above experts.
First distribute the arrears of salary for relevant year i.e. FY 2005-06, 2006-07, 2007-08 and 2008-09. Notionally add these arrears to the income of respective year and compute the additional tax liability for each year. Say the sum of all this is amount X.
Now, compute the additional tax liability in current year which is arising due to receipt of arrears. Say this amount is Y.
If Y is more than X, you get tax relief of amount equivalent to Y-X u/s 89(1). If the situation is reverse, don't spare much time on this.
As far as tax saving is concerned, you are eligible for maximum deduction of Rs 1 Lakh u/s 80C which may be spread over Life Insurance, PPF, NSC, ELSS Mutual Fund, Bank Deposits etc. PPF gives you tax free returns but not a regular source of income. ELSS though provides tax free returns but it is fraught with risk associated with equity markets.
