Falling interest rates amid rising inflation cause of worry for retirees

The falling interest rates amid rising inflation have made life difficult for investors, especially the senior citizens and the retired who have to depend on pension income for survival.

What is worse is that even the annuity or pension received is not tax-free which is leaving senior citizens with limited funds to meet their household needs.

No wonder, with the Budget 2021 around the corner, senior citizens as well as those nearing retirement or who have retired recently want the government to make retirement benefits as well as pension plans tax-efficient.

Take the case of Mr Roop Sircar, a senior executive who retired recently. He doesn’t only seem concerned about the falling interest rates, but higher taxes also. He believes the year 2020 was not only the most difficult year to live in, it was also the worst year to retire in.

That is because not only will retirees get a much lower pension, they will also have to pay higher taxes,” he says, adding that “in order to revive the economy, RBI has enhanced liquidity and driven down interest rates. Retirees are finding that the annuity from their superannuation funds are a meagre 5 to 5.4 per cent per annum. Post tax, this may range from 3.5 to 4 per cent per annum which is well below inflation.”

While interest rates may remain low for the next 1 or 2 years, the pension is fixed for life. Fixed deposit rates offered by banks are also at an all-time low.

The higher taxation, according to Sircar is on account of increase in income from retirement benefits like Leave Encashment and Gratuity which are taxed beyond a certain level. This doesn’t only increase the slab rate of the pensioners but also makes them liable to pay the recently-introduced surcharge to meet the budget deficit. This again reduces the investable surplus in the hands of pensioners.

Presumably, the Finance Minister did not intend to tax retirees, but this is what is happening.

For most pensioners, the tax rates will go up by 10 to 25 per cent.

“If you are retiring from a government employment, you are far more fortunate because your pension is based on your last-drawn salary and the number of years served and is not linked to the annuity rate. Not only this, it will keep on increasing every year in line with inflation and the commuted value will also revert back after 15 years. The leave encashment of government employees is also fully exempt from tax up to 300 days,” informs Sircar. That is, however, not the case with the private sector employees.

Commenting on the woes of the retired persons and other taxpayers, income tax experts say that we have a graded system of taxation with the 30 per cent tax rate being triggered at Rs 10 lakh income level. Further, individuals with over Rs 50 lakh of income are subject to surcharge at 10 per cent which increases to 15 per cent for taxpayers with income over Rs 1 crore, to 25 per cent for income over Rs 2 crore and 37 per cent for income over Rs 5 crore.

The retirement benefits typically include Gratuity, PF and Pension, NPS, etc. Pension and gratuity workings are based on the years of completion of services/defined formulae.