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Income Tax on Pension

Last Update Date : April 22, 2018

It used to be that the “bread winner” of the family would worry about the livelihood of his family, post retirement.  However, with pension schemes available from government, private companies and schemes from banks, a person can rest assured he and his family will continue to enjoy a comfortable standard of living even post retirement.  This guide will help you understand pensions and answer your question of is pension taxable.

is pension taxable

What is Pension?

Pension is a fixed amount of income received to an individual as reward/compensation for the past services and it is paid by the government, a private company or any institutions facilitating pension schemes. After retirement, an individual receives pension, gratuity, etc; to continue the same lifestyle as before.
Pension is not only received after retirement but can also be en-cashed while earning income, however It will be taxable.  Pension is taxable under the head, “Income earned from salaries.”

Who is Eligible For Pension?

Along with the  individual, his/her spouse, children under 25 years of age and/or an unmarried daughter can also receive the pension amount.  There are two types of pension amounts:

  • Commuted pension
  • Uncommuted pension

Commuted Pension

When a person is entitled to receive pension, he/she decides to receive a lumpsum amount at the time of retirement. Hence, the advance pension received is considered as commuted pension.

Example: If a person is entitled to receive of Rs. 25000/- p.m., in pension and he/she decides to withdraw 20% of pension received for the next 5 years. (i.e. 25000*12*5= 1500000), then his commuted income is Rs. 300000/- (i.e. 20% on Rs. 1500000/-) So, he/she will receive Rs. 20000/- p.m. for 5 years.

Tax on Commuted Income

  • Commuted income received by the government is non-taxable. (Fully exempt)
  • Non-government employees, who receive Gratuity along with Commuted Pension, get a tax exemption of up to 1/3rd of the total amount
  • Non-government employees who do not receive Gratuity, the taxable exemption amount from is 1/2 of the total commuted pension received.
  • The judges of supreme court and high court are given 50% of exemption of commuted pension.
  • Any commuted pension that is received from the LIC India, will be exempt.

Uncommuted Pension

There are individuals who prefer to receive income on a periodical basis, such as Rs 25,000 p.m as their pension amount.

Taxability

  • Any amount received as uncommuted pension is fully taxable under the head of salaries.
  • Irrespective of it received by the Government or non-government employees.
  • Any income received from UNO as pension is non-taxable, as it is the income received from armed forces.
  • Also, if a family member is entitled to receive pension from UNO, then that income is also exempt from tax.
  • From financial year 2018-19, there is a standard deduction of Rs. 40000/- that can also be claimed under pension as it is a part of income under heads of salaries.

Family Pension:   Pension received by a family member of any employee in case of death of an employee is taxable under the head “Income from other sources,” as there is no relationship between the employer and employee.

Taxability:  In this case, the pension received is uncommuted pension. Hence, 1/3rd of the uncommuted pension or Rs.15000/- whichever is less is to be exempted from tax.

Tax deduction at Source (TDS) on Pension

In case you are an individual receiving pension amount through any nationalized bank, then the bank deducts TDS.  TDS is also deducted by the employer in case of salaried employees, since pension comes under the head of salaries. However, TDS is not deducted for pension received by a family member.

To know how to maximize the tax saving options available to you for better tax saving and planning, consult your personal tax expert at H&R Block India.

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