We were working on financial and investment plans for some of our retiring investors and we decided to again have a look at what exactly is the Govt charging us for commutation. So, we calculated for two cases (both are more-or-less similar except for small variation in age) where both the officers are commuting 50%:
Case1:
Salary (Basic + MSP) – Rs 2,33,100
Pension – 1,16,550
50% Commuted Pension – 58,275
Commutation amount received – Rs 59,52,442
Upfront annual Rate of Interest (ROI) charged – 8.40%
Since commuted amount not taxed, ROI with 30% tax saved = 5.88%
Case2:
Salary (Basic + MSP) – Rs 2,25,500
Pension – 1,12,750
50% Commuted Pension – 56,375
Commutation amount received – Rs 58,36,166
Upfront annual Rate of Interest (ROI) – 8.18%
Since commuted amount not taxed, ROI with 30% tax saved = 5.72%
So, overall we can say that:-
The Govt charges approx. 8.30% rate of interest
After accounting for tax-free commutation, the effective rate to the officer comes to be about 5.80%