What is Income tax on Pension

What is Income tax on Pension

What is pension?

Pension is an amount paid periodically, usually monthly, to the employee by the employer for his services in the past after a certain age. 
Sometimes pension may be received as lumpsum also from employer 
There are many pension schemes available to persons who are not in the employment provided by insurance companies, by NPF. 
After the introduction of NPS, individual can get pension even if he is not an employee of someone. He can invest on his own into that scheme and get pension after a certain age. Such investment in the NPS can be claimed as deduction also under section 80CCC & 80CCD.

Taxability of pension?

Generally, pension is taxable under the head “salaries”.

Uncommuted pension: -

Uncommuted pension means amount received periodically by the employee. It is in the nature of salary. It is always taxable in the hands of employee under the head salaries. It is irrelevant whether government employee is or not.

Commuted pension:-

Commuted pension means employee receives a certain portion of his pension in lumpsum in advance. It is taxable to a certain extent and exempted in certain cases. 
1. Government employee: - if any commuted pension received by employee of govt./ local authority/ statutory corporation, it is exempted under the section 10(10a)(i). 
2. Non-government employee: - Commuted pension is exempted to a certain sum. Exemption is given on the basis of his gratuity status. 
a. Received gratuity: - 1/3rd of the pension which he would have received had he commuted 100% pension. 
b. Not received gratuity: - 1/2nd of the pension which he would have received had he commuted 100% pension.

Is TDS deductible?

Yes, TDS on pension is deductible under section 192. 
If pension is received by family member then TDS is not deductible as it is not covered under sec 192.

Pension received by family members?

1. Uncommuted: -

As there is no employer-employee relation any more, under section 57(iia), any uncommuted pension received by family members is taxable under the head “Income from other sources”. 
But an exemption of 1/5th of pension received or 15,000 whichever is lower is allowed.

2. Commuted: -

If pension is received by family members in lumpsum (commuted), it is not taxable. 
Some points to be noted: - 
• Pension from UNO – received by employee or family is not taxable. 
• Supreme court judges are eligible for an exemption of commuted pension not exceeding 50% of total pension. 
• Any commuted pension received from LIC will be exempted. 
• Pension received by family members of armed forces is exempt under Sec.10(19). 

Conclusion: - 
Pension is always an assurance of regular income at your old age. So it is better to invest in NPS if you are not an employee where the organization will give you pension at your old age. In order to encourage this the government is encouraging investment in NPS by way of allowing deduction under sec. 80CCC & 80CCD.

Best TAX advice for Freelancers, Professionals, Trader and Web based agencies.

  • CA Assisted filing for saving tax
  • Support on Call/Skype/Email
FREE 10* min of consultation