PENSION

Pension is a retirement benefit. Since this is payable to an employee or to his dependents by virtue of past employment, this is taxed as salary in the hands of the employee. Tax is deductible on pension income under section 192 of Income Tax act on payment. However, family pension received by the dependents of the employee will be taxed under the head income from other sources as there is no employer employee relationship between the payer and payee. TDS is not deductible on family pension as it is not covered under section 192 of the Income tax act.

 

The provisions under Income Tax are enumerated below:- 

 

Sr. No.

Different Situations

Tax Treatment

1

Pension received from the UNO by the employee or his family members

It is not chargeable to tax

2

Family pension received by the family members of the armed forces

It is exempt under section 10(19) in some cases

3

Family pension received by the family members after the death of an employee (not covered by case 2)

It is taxable in the hands of the recipients under section 56 under the head “Income from other sources”. Standard deduction is available under section 57 which is 1/3rd of such pension or Rs. 15,000/- whichever is lower.

 

Pension received by the employee (during his lifetime) in any other cases:

There are two type of pension viz; Commuted and Uncommuted Pension. Treatment of both type of pension is different as per section 17(1)(ii) of Income Tax Act,1961. Normally pension is paid after death or retirement of employee by his/her employer as monthly payment but when employer pays any lump sum payment, it is known as commuted pension. Uncommuted pension is the periodical payment of pension. Treatment of  Exemption on both type of pension is as under:

Uncommuted Pension:

For Government or non-Government employee, uncommuted pension is fully taxable.

 

Commuted Pension:

1.    Commuted pension received by employee of local authority, Government organisation or statutory corporation under Civil Pensions (Commutation)

     rules of the Central Government or under any other similar scheme is wholly exempted from tax as per Section 10(10A)(i).

 

2.    Commuted pension received by any other employee:

     1.  Employee receive Gratuity also: In case employee receive gratuity along with pension, commuted value of one-third of pension which    

          normally he/she is entitled to receive is exempt from tax

     2. Employee doesn’t receive Gratuity: Commuted value of one-half of such pension is exempt from tax.

 

 

When pension amount received by employee exceed exemption limit as mentioned above, such exceed amount is liable to tax when it is due or paid.

Family pension received by family members of employee is taxable in the hands of recipients under head “Income from other Sources “and not under head “Income from Salary”.

 

Example: 1

Mr. X retires from Govt service as on May 31, 2012. He gets pension of Rs. 15,000 per month up to December 31, 2012. With effect from January 1, 2013, he gets One third of his pension commuted for Rs. 10,00,000 . He is not in receipt of Gratuity. Solution:- Uncommuted pension [periodical payments] is always chargeable to tax. Commuted pension is exempt from tax in the case of Government Employees. Therefore, commuted pension of Rs. 10,00,000/- is exempt. The amount of taxable uncommuted pension is calculated as under:  Uncommuted pension June 1 to Dec 31, 2012 = Rs.1, 05,000/- [i.e. Rs. 15000 x 7].  Uncommuted pension Jan 2013 to March 2013 = Rs. 30,000/- [Rs. 15,000 x 2/3 x 3].  Total amount of uncommuted pension chargeable to tax = 1, 35,000 /- 

Example: 2

Mr. X retires from ABC Ltd as on June 30, 2012. He gets pension of Rs. 20,000 per month up to Jan 31, 2013. With effect from Feb 1, 2013, he gets 60% of pension commuted for Rs. 10,00,000/-. He also received Gratuity of Rs. 50,000/- up on his retirement.

 

Solution:-

A]. Uncommuted Pension:-

July 2012 to Jan 2013 @ Rs. 20,000/ Month = 1,40,000/-  Feb 2013 to March 2013 @ Rs. 20,000/ Month x 40% = 16,000/-  [Since 60% is commuted, only remaining 40% will be received monthly].  Total amount of uncommuted pension for the year 12-13 = 1,56,000/- [ 1,40,000 + 16,000]

B]. Commuted Pension :-

Amount of commuted Pension = Rs.10,00,000/- [ being 60%]  Therefore full value of commuted pension = 10,00,000 / .6 = 16,66,667/-  As Mr. X receives gratuity, 1/3 of full value of commuted pension is exempt from tax ie; 16,66,667 X 1/3 = 5,55,556 is exempt from tax, hence the taxable amount of commuted pension = commuted pension received minus pension exempted Ie; 10,00,000- 5,55,556 = 4,44,444 is taxable

C]. Total amount of taxable pension for the p/y 2012-13 = 1, 56,000 + 4, 44,444 = 6,00,444 /-