Pension means an amount for the consideration of past services payable after the retirement of person. Generally, Salary is received in the form of Pension after the end of employment services. There are provisions laid down in Income Tax Act, 1961 for charging tax liability on pension income. This we will discuss in this article.
Pension can be of one time or periodic payment made by
- Government, or
- Company or
- the employers of the employees.
What are the types of Pension?
There are two types of Pension-
- Commuted Pension – It means lump sum amount commuted as part or whole of pension. For example, Rs 15 lakh pension received as whole at one time.
- Uncommuted Pension – It means pension received periodically. For example, Rs 10,000 received as pension on per month basis.
What is the treatment of Income tax on Pension Income?
Pension is taxed under Income from Salary Head in the Income Tax Return (ITR). Taxability of pension income depends on the type of the receipt of pension-
1. Commuted Pension
- It is Exempted for –
- Government employee or
- Employee of local authorities or statutory corporation, or
- Member of Civil or defence Services
- For other Persons–
1) If person is receiving Gratuity, exemption =
1/3 X (Commuted pension received / Commutation %) X 100 %
2) If person is not receiving Gratuity, exemption =
1/2 X (Commuted pension received / Commutation %) X 100 %
2. Uncommuted Pension
If pension is received in the form of Uncommuted pension, it is taxable in the hands of recipient, whether employee of Government or not.
Let’s understand this with the following example:
Mr. BabaTax retired on 1st October 2019, receiving pension of Rs. 10,000 per month. On 31st January, he commuted 60% of his pension and received Rs. 30,00,000 as commuted pension. The left 40% will be uncommuted pension amount receivable in February and March for FY 2019-20. The taxability of Pension will be as follows-
1. If he is Government Employee, Income Tax on pension will be :
| Particular | Details | Amount |
| Uncommuted pension received (Oct – March 2019) | (10,000 X 4) + (10,000 X 40% X 2) | 48,000 |
| Commuted Pension received | Rs. 30,00,000 | |
| Less: Exemption u/s 10(10A) | Rs. 30,00,000 | 0 |
| Taxable Pension | 48,000 |
2. If he is employee of Reliance Ltd, which is private sector company, and he even receives gratuity.
| Particular | Details | Amount in Rs. |
| Uncommuted pension received (Oct – March) | (10,000 X 4) + (10,000 X 40% X 2) | 48,000 |
| Commuted Pension received | 30,00,000 | |
| Less: Exemption u/s 10(10A) | 16,66,667 | 13,33,333 |
| Taxable Pension | 13,81,333 |
3. If he is employee of Reliance Ltd, and he does not receive the gratuity, Income Tax on pension will be :
| Particular | Details | Amount in Rs. |
| Uncommuted pension received (Oct – March) | (10,000 X 4) + (10,000 X 40% X 2) | 48,000 |
| Commuted Pension received | 30,00,000 | |
| Less: Exemption u/s 10(10A) | 25,00,000 | 5,00,000 |
| Taxable Pension | 5,48,000 |
The picture below summarizes the liability of Income tax on pension in India-
Family pension in India
What is Family Pension?
Family pension means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of employee’s death.
What is the liability of Income tax on Family Pension?
It depends on the nature of the receipt of pension. Family pension is taxed as Income from other source, under section 57 of Income Tax Act, 1961.
a. Commuted Pension: It is fully exempt in the hands of the family member.
b. Uncommuted Pension: It is exempted with the following circumstances:
The lower of following amount is exempted :
– Rs. 15,000
– 1/3rd of uncommuted pension received.
Let’s understand it with the help of following example:
Mr. X retired on 30.09.2019, and was in receipt of monthly pension of Rs. 10,000 per month. But, unfortunately he died on 31.01.2020. On 01.02.2020, his wife, Mrs. X commuted 60% of his pension and received Rs. 30,00,000 as commuted pension.
Taxability of pension in the hands of Mrs. X :
| Particular | Amount in Rs |
| Commuted Pension received | 30,00,000 |
| Less: Exempted | 30,00,000 |
| Taxable Pension | Nil |
| Uncommuted Pension (Feb – March) (10,000 X 2 X 40%) | 8,000 |
| Less : Deduction available (15,000 or 1/3rd of 8000, whichever is less) | 2667 |
| Taxable Pension | 5,333 |
The picture below summarizes the tax on Family Pension in India-
For any questions, you may reach us at Discussion Forum
The author of the above article is CA Ankita Gandhi.
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