Tax on Pension Income: Computation of Amount Exempted

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At the time of retirement of an employee, the employer pays the employee a certain amount regularly in consideration of his past service. This periodic payment is paid by the employer to his employee is referred to as Pension.

After the introduction of the National Pension Scheme, not only can the employer pay pension after retirement but the Pension Scheme can also pay Pension. The individual taxpayers may also invest in a pension plan which will give them pension after retirement. Such investment in pension plans can also be claimed as a deduction under Section 80CCC & Section 80CCD

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The amount received as pension from the employer or from the pension fund or from any other source as pension would be liable to income tax. Computation of Income Tax on Pension Income has been explained below in this article.

Before understating the computation of tax on pension, it is important to understand that there are 2 types of Pension:-

1. Uncommuted Pension: Uncommuted Pension refers to Pension received periodically. Any amount received as Uncommuted Pension is fully taxable in the hands of both govt and non-govt employees.

2. Commuted Pension: Commuted means Interchange. Many employers allow the employee to forgo a portion of the pension and receive a lump-sum amount by surrendering a portion of the Pension. Such amount received is known as Commuted Pension. The pension may be fully or partly commuted.

For example, suppose a person is entitled to receive a pension of Rs. 2000 pm for the rest of his life. He may commute 1/4th i.e. 25% of this amount and get a lump-sum of Rs. 30,000. After commutation, his pension will now be the balance 75% of Rs. 2000 pm i.e. Rs. 1500 pm

Income Tax on Commuted Pension

Computation of income tax on Commuted Pension at the time of filing of Income Tax Return under Section 10(10A) would be as follows:-

Amount received as Commuted Pension  xxx
(Less) Amount exempt (xxx)
Amount chargeable to Tax as per Income Tax Slabs  xxx

Computation of Pension amount exempted

  1. Received from Govt employer: Fully Exempt from Income Tax. In other words, no income tax on pension received from Govt.
  2. Received from Non Govt Employer: The following amount shall be exempted from the levy of Tax on Pension Income
tax-on-pension

Tax on Pension Income

The pension received shall be “taxable under head Salary” in the manner as shown above

However as per Section 57(ii)(a), if uncommuted family pension is being received after the death of the employee by the family members, the pension so received would be taxable under the head – “Income from Other Sources” as employer-employee relationship does not exist in this case. In such a case, where uncommuted family pension is being received by the family members – 1/3rd of the Pension received or Rs. 15,000 whichever is less shall be exempt.

However, as per Circular No. 573 dated 21/08/1990, if any commuted pension is being paid to the family members, no tax would be levied on commuted pension.

Relevant Points regarding Tax on Pension

  1. ½ of the commuted  pension received by the judges of the Supreme Court and the High Court would be allowed as exemption (Circular No. 623 dated 06-01-1993)
  2. No tax on pension income would be levied on any amount received from UNO

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A Personal Finance enthusiast, Karan is the founder of charteredclub.com and loves to discuss about Money related matters.