Street Talk
Expert Opinion
I have been receiving queries about income tax relief announced by the finance minister in the union budget 2025. Various segments of senior citizens, especially government pensioners getting their pension through banks, want to understand the exact benefits of the tax relief announced for them.
Actually, the last quarter of the financial year is always loaded with maddening moments specifically for the employees and the pensioners on account of income tax liability. Almost everyone among them gets busy in financial planning to scissor income tax. Those falling in the income tax net once again gear up to make this February a very sane one by exploring avenues where they can claim income tax rebate or even exemption.
It has been commonly observed that most of the retired government officials are always curious to seek information about tax deduction on their pension amount. Most of them are ‘confused’, and criticize the government as well as the banks for ‘forcibly’ making them to pay income tax. Some of them call pension simply a compensation which could have either been kept out of tax net or at least not subjected to tax deduction at source.
However, there are certain rules which make income tax applicable to senior citizens especially the pensioners. Before deliberating upon these rules, let me reproduce the income tax relief granted to senior citizens in the budget 2025.
The Budget 2025 has tax relief for senior citizens in terms of increase in the threshold limit for tax deducted at source (TDS). The TDS threshold on interest payouts for senior citizens has been raised to Rs 1 lakh from Rs 50,000. This change will provide extra financial cushion to the senior citizens by way of more cash in hand. In other words, the increase in TDS will leave a larger disposable income in their hands. Now they won’t have to wait for the refund of taxes paid.
There is tax exemption also granted for withdrawals from National Savings Schemes (NSS) by senior citizens holding old accounts where interest is no longer payable, provided withdrawals are made after August 29, 2024.
The budget has TDS changes also for other resident individuals. It has increased the TDS threshold on interest payouts for other resident individuals to Rs 50,000 from Rs 40,000. The TDS threshold on dividends from mutual funds has been increased to Rs 10,000 from Rs 5,000. These changes are going to put more money in the hands of small investors.
Meanwhile, the basic exemption limit for senior citizens remains Rs 3 lakh under both tax regimes. However, for senior citizens above the age 80 years, the limit is Rs 5 lakh under the old regime.
Tax rules applicable to pensioners:
Now, let’s come to income tax rules applicable to pensioners. Even as pension under Pension Act is defined as compensation, in income tax rules it is included in salaries. According to the rules of taxation, an uncommuted pension is viewed as a salary under the Income Tax Act, 1961, and is therefore taxable.
So, persons who receive their pension on a monthly basis are taxed in the same way as individuals who receive a regular salary. Notably, pensioners are required to file taxes for the amount they receive as a pension under salary income. In cases where the interest is earned on investments made, the interest amount is taxed as income from other sources. However, interest earned from investment instruments such as the Public Provident Fund (PPF) is completely exempt from any taxation.
The Central Board of Direct Taxes (CBDT) has also clarified that in the case of pensioners receiving pension through banks, provisions of TDS are applicable in the same manner as they apply to the salary income.
Tax liability of a pensioner:
To know the tax liability, one has to first understand that income from his/her pension (considered as salary under income tax rules), financial instruments and business transactions like sale of property, interest income from banks, commissions and incentives, payment received for contracts and services, vendors, dividends and awards or prizes earned as money, will be counted for calculation of the income tax. Once one finds the annual earnings crossing the threshold limit of exemption, one is in the tax net and tax deduction at source (TDS) will come into force.
It is notable that those who receive ‘family pension’ don’t fall under salary earning category and don’t not fall under tax net. Notably, there is no provision for deduction of tax at source on “income from other sources”.
Understanding TDS:
Tax deduction at source (TDS) is the spot deduction of tax from the income source itself at the time of earning. The rate for tax deduction is not uniform. Notably, the banks are responsible for complying with tax deductions at source provisions in case of pensioners, as they disburse the pension amount. Whosoever is found to have earnings beyond the threshold limit for paying income tax, the bank has to deduct the same from their pension accounts.
Meanwhile, there have been innumerable instances where bank depositors especially the senior citizens have found tax deduction made from the principal amount of their fixed deposits. here it is imperative to understand the rules governing TDS.
Rules clearly state that TDS can be deducted only from interest income and not from the principal amount. As per Central Board of Direct Taxes (CBDT) norms, banks have to deduct tax in advance per quarter on an accrual basis. This means banks typically calculate the total interest earned in a year, even in case of cumulative term deposits where the interest is not paid out but rolled back into the fixed deposit.Basically, the tax is deducted on the income earned and in case of fixed deposits, any TDS can be recovered from the interest income only. Notably, TDS is to be recovered and remitted in the year of accrual and not on maturity.
Pertinently, if the bank deducts the TDS at one shot at the end of the year instead of every quarter, then they have to inform the customer accordingly.
There is a good section of customers who are victims of wrong TDS and fail to report it to the bank or any concerned authority.
The affected customers can, in the first instance, approach the bank and apprise them about the matter. If they fail to resolve the issue at the bank, explore lodging complaints with higher authorities. If they still go unheard, they should approach the Banking Ombudsman where the complaint as per extant guidelines would be resolved in a given time frame.
Time to seek tax rebate or exemption:
This is the right time for pensioners to find out where they stand in terms of income tax issues. If in tax net they should submit all the relevant investment details, rebates and exemptions if any, along with the supporting documents.
Even if the bank has deducted any tax amount from a pensioner’s account, he/she can seek refund by presenting relevant tax rebate documents to the bank.
However, it would be better for them to seek consultation on tax matters from a tax consultant.
(The author is Editor-in-Chief Straight Talk Communications. He is former head of corporate communications & CSR Department and Internal Communication & Knowledge Management Department, J&K Bank)