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Tuesday, December 6, 2016

Pension is Taxed

 

Pension is a retirement benefit that an employee receives if his employment terms so provide. It is usually paid monthly. One may choose to receive a portion of it in lump sum. Some taxpayers contribute towards a pension fund and receive monthly pension after they retire.

As a thumb rule pension is always taxable. It is taxed under the head 'income from salary' in your income tax return. Sometimes a taxpayer may choose to 'commute' a portion of their pension. When pension is paid as a lump sum it is called commuted pension.

Let's understand commuted pension by way of an example.

At retirement, you may choose to receive a certain % of your pension in advance. Such pension received in lump sum is called commuted pension. For e.g. – At the age of 60, you decide to commute 10% of your monthly pension of the next 10 years of Rs 10,000. This will be paid to you as a lump sum. Therefore, Rs (10% of 10000) x 12 x 10 = 1,20,000 is your commuted pension. You will continue to receive Rs 9,000 (90% of your pension of Rs 10,000) for the next 10 years until you are 70. After 70 years of age, you will be paid your full pension of Rs 10,000.

 Commuted pension or lump sum received may be exempt in certain cases.

For a government employee, commuted pension is fully exempt.

For a non-government employee, it is partially exempt.

  • If Gratuity is also received with pension – 1/3rdof the amount of pension that would have been received if 100% of the pension was commuted is exempt from commuted pension and remaining is taxed as salary. 
  • Only pension is received, gratuity is not received – ½ of the amount of pension that would have been received if 100% of the pension was commuted is exempt.

Uncommuted pension or any periodical payment of pension is fully taxable like salary. In the above case Rs 9,000 received by you is included under income from salary. Rs 10,000 starting the age of 70 years is fully taxable as well.


Pension received by a family member is taxed under 'income from other sources'. Some exemption is allowed on uncommuted pension or monthly pension received by a family member. Rs 15,000 or 1/3rd of the uncommuted pension received -whichever is less is exempt from tax. If a portion of the pension is commuted it is not taxable for the receiver.


Pension that is received from UNO by its employees or their family is exempt from tax. Pension received by family members of Armed Forces is also exempt.


Tax benefits on contribution – Contributions made to a pension fund are eligible for deduction under section 80C. A maximum of Rs 1,50,000 can be claimed under section 80C.


If you are contributing to an NPS account, deduction under section 80CCD(1B) can be claimed by you. The maximum amount that can be claimed under this section is Rs 50,000. But amount received on maturity is fully taxable unless invested in annuities. And monthly receipts from an annuity are fully taxable as well.






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