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Is pension a subject to tax? | Company Vakil

Is pension a subject to tax?

INTRODUCTION

It is stated in the Income tax return that the pension paid to a beneficiary is taxable under the head salaries. Pension is conventionally reimbursed on a monthly basis but you can also opt for commuted pension (taken in lump sum). Commuted pension is the pension received in advanced. To understand how commuted pension works let’s take an example- when you choose to take a certain percentage of your pension in advance at the time of retirement, that advance pension is called commuted pension. For example- Rs 10,000 is your periodical monthly pension for next 10 years.  At age of 60, you decided to take 10% of that pension in advance as a lump sum. Therefore Rs 1, 20,000 is given to you as commuted pension that you decided to take in advance. After that you will continue to receive your un-commuted pension of Rs 9,000 for next 10 years. Once you reach 70 years of age, you will be paid with Rs 10,000 as your full monthly pension.

 

Taxability of commuted and uncommuted pension

  • In certain cases, the commuted pension may be exempted, like, commuted pension is fully exempted for a government employee whereas it is partially exempted for non- government employee. In cases where Gratuity is received with pension, 1/3rd amount of pension is exempted from commuted pension if 100% of pension is commuted. The remaining amount is taxed as salary. In other case where only pension is received without gratuity, ½ amount of pension is exempted from commuted pension if 100% of pension is commuted.
  • Whereas uncommuted pension (periodical pension) is fully taxable as normal salary. Hence the 9,000 rs received as monthly pension till age of 70 are fully taxable. The further pension of Rs 10,000 monthly after age of 70 is fully taxable as well.

 

PENSION RECEIVED BY A FAMILY MEMBER

If a member in your family is receiving pension, then their pension is taxed under income from other sources in income tax return. But in case where the pension is received in lump sum or as commuted pension then it is not taxable. However, the uncommuted pension is exempted to certain extent. Out of rs 15,000 or 1/3rd of uncommuted pension received, one which is less will be exempted from tax.

For example- the pension of Rs 1, 00,000 received by a family member, the available exemption is of least Rs 15,000 or Rs 33,333 (which is one third of total pension). Thus the amount which is taxable will be Rs 1, 00,000 – Rs 15000= Rs 85,000.

PENSION THAT IS RECEIVED FROM UNO

If an employee or their family member is receiving pension from UNO then it is exempted from tax. If a family member of armed forces is receiving pension then it is also exempted.

For any query related to tax on pension, react us at XYZ and we will be happy to help you out.

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