Tax on Pension: Explains How Pension Taxed in India

You will start getting a pension when retiring from your employer. As far as the taxpayer is concerned, it is important to know about the tax on pension.

Pension is a regular payment to the employees after their retirement.

Earlier the pension was paid by the employer to the employees.

Recent pension reforms and set up of National Pension Scheme (NPS), has gained general public a chance to access to and part in the pension receiving community.

NPS is a pension and investment scheme in India. So the individual can invest in this long term pension scheme.

Then what about the tax on pension contribution ?

Taxpayers who invest in NPS can claim the tax deduction under Section 80CCC and 80CCD of the Income Tax Act, 1961.

Atal Pension Yojana (APY) is another initiative by the Central Government to provide a guaranteed minimum pension to the patrons.  APY also governed by the Pension Fund Regulatory and Development Authority (PFRDA) and eligible for a tax deduction. 

The total amount of deduction available to the taxpayers as per the Section 80C, 80CCC and 80CCD can not exceed INR 1,50,000.

In this article, we try to discuss the types of pension and calculation of tax on pension.

Tax on Pension

Pension is a component in the computation of the Taxable Salary. It will be divided as Commuted pension and Uncommuted pension.

Read : How to Calculate Taxable Salary

Uncommuted Pension 

When the employee receives the pension periodically, it is called an uncommuted pension

Eg:1
At the time of retirement, Mr Luway decided to receive a pension every month. So every month, he can receive a certain amount, say INR 10,000 as his pension. This type of receipt of pension is called Uncommuted Pension.

This pension is fully taxable irrespective of Government or non Government employees.

Commuted Pension

When an employee is receiving the Pension in a lump sum, it is called a Commuted Pension.

Eg: 2
At the time of retirement, Mr Abhijit decides to receive his 80 %  of his pension in advance. Suppose his monthly pension is INR 15,000. 

The 100 percentage of  Commuted amount is INR 7,50,000. He receives INR 6,00,000 as Commuted Pension in advance. So his monthly pension will be only INR 3000.

tax on pension

1. Government Employees

1. (a) Commuted Pension Received by Government Employee

As per section 10(10A) (i) of the Income Tax Act, 1961, the pension received by the Government employees is fully exempt from his income.

Eg:3
It means if Mr Abhijth, in the above case(Eg: 2), is a retired Government employee, the total of INR  60,000 exempted in the calculation of his total salary income.

 Here the government employees include the Central, State Government, local authority, statutory corporations and judges of the high court and supreme court.

2. Non-government Employee

2. (a) If the Employee Receives Commuted Pension and Gratuity.

The tax treatment is different for those who receive gratuity and pension in case of the employees retired from Non-government organization. 

As per Section 10(10A) (ii), if the employee receives both commuted pension and gratuity, one third (⅓) of the total pension is exempt.

To get this exemption, it is not required to cover these employees under the Payment of Gratuity Act.

Suppose Mr Abhijith is a non-government employee. At the time of retirement, Mr Abhijit decides to receive his 80 % of his pension in advance. Assume his monthly pension is INR 15,000. 

The total Commuted amount is INR 7,50,000( The total pension amount the assessed is normally claimed ).

He receives INR 6,00,000 as Cammuted Pension in advance. In this case, he may receive a monthly pension of INR 3000. ( 20% of 15000).

Calculation of Taxable Pension if the employee Received Pension & Gratuity ( Non-Government Employee)

ParticularsDetailsAmount (INR)
Commuted pension Received 6,00,000
Less : Exempted u/s 10(10A) (ii)
⅓  of 750000
2,50,000
Taxable Pension3,50,000

2.(b) Commuted Pension Received but Gratuity not received

Commuted pension received by an employee and if he does not receive gratuity, in this case, one half (½) of the total commuted pension is exempt.

Calculation of Taxable Pension if the employee Received only Pension ( Non-Government Employee)

ParticularsDetailsAmount (INR)
Commuted pension Received    6,00,000
Less : Exempted u/s 10(10A) (ii)
 ½ of 750000
  3,75,000
Taxable Pension 2,25,000

If the commuted pension is taxable, we can get a relief u/s 89 of the Income Tax Act,1961.

Tax on pension Received by Widow

If a widow or legal heir is received a pension, it can not be taxed as salary income. It is taxable as per Income from other sources.

Pension from the United Nations Organization

Retired Employees or widows receive a pension from UNO is not taxable.

Conclusion

These are the main points we required to weigh with regards to the tax on pension. We need to recollect that if a person receives the pension from the former employer, it is coming under the head of “Salary Income”. If the pension is collected by a person on behalf of his family member of a departed employee, it is assessable under the head of “Income from other Sources”.

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