Pension income is a vital source of financial security for retirees. However, like most forms of income, it may attract taxes. This blog explores the nuances of pension taxation in India, helping taxpayers understand their obligations and make informed financial decisions.
What is Pension?
Pension is a periodic payment received by individuals post-retirement as a reward for their past services. It acts as a steady income stream for retired employees, ensuring financial stability in their golden years. Pension can be received directly by the retiree or, in some cases, by family members upon the pensioner’s death.
Taxability of Commuted Pension
Commuted pension refers to the lump-sum amount an individual receives by giving up a portion of their periodic pension. It is often opted for by retirees to meet significant financial need or as an investment for the future. The taxability of commuted pension depends on the type of employment and the specific conditions of the recipient’s pension scheme. Here’s a detailed look:
1. Taxability for Government Employees
For government employees, the entire commuted pension amount is exempt from tax under Section 10(10A)(i) of the Income Tax Act. This exemption applies to employees of:
- Central Government
- State Government
- Defense Services
- Local Authorities
The complete tax exemption on commuted pensions for government employees makes it a tax-efficient option for those in public service.
2. Taxability for Non-Government or private sector
Employees
For non-government employees, the commuted pension is partially exempt, subject to certain conditions as per Section 10(10A)(ii) of the Income Tax Act. The exemption amount depends on whether the individual is also receiving gratuity:
1. If Gratuity is Received:
In such cases, only one-third of the commuted pension amount is exempt from tax.
2. If Gratuity is Not Received:
If the individual has not received gratuity, the exemption increases to one-half of the commuted pension amount.
The balance amount, after claiming the exemption, is taxable under the head “Income from Salary.”
Taxability of Uncommuted Pension
Uncommuted pension refers to the regular, periodic payments received by a retired individual as a reward for their past employment. Unlike commuted pension, which is received as a lump sum, uncommuted pension serves as a steady source of post-retirement income. It is treated as a form of salary for both government and private sector employees and is fully taxable under the head “Income from Salary.” Taxpayers can claim standard deductions applicable to salary income, reducing their taxable liability.
Pension Received by a Family Member
When a family member receives pension after the demise of the pensioner, it is referred to as a family pension. Unlike the pension received by the retiree, family pension is taxed under the head “Income from Other Sources.”
Recipients can claim the following deduction:
33.33% of the family pension received or ₹25,000, whichever is lower. (This amount of Rs. 25,000 has been increased from Rs.15,000 with effect from FY 2024-25)
How to Report Pension Income in ITR
Step 1 – Log in to the Income Tax Portal:
Visit https://www.incometax.gov.in and log in using your PAN and password.
Step 2 – Choose the Correct ITR Form:
Select ITR-1 if you are a pensioner with total income up to ₹50 lakh and no additional income like capital gains.
Choose other ITR forms if you have complex income sources.
Step 3 – For ITR-1:
Navigate to the ‘General Information’ section.
Under ‘Nature of Employment’, select ‘Pensioners’.
Specify the type of pensioner:
- CG-Pensioners (Central Government Pensioners)
- SG-Pensioners (State Government Pensioners)
- PSU-Pensioners (Public Sector Unit Pensioners)
- Other Pensioners (Non-government pensioners).
Step 4 – Report Pension Income as Salary:
Enter the following details:
- Name of the employer/pension provider.
- Address of the employer.
- Tax Collection Account Number (TAN) of the employer.
- Total pension amount received.
- Tax Deducted at Source (TDS) details, as per Form 16 or Form 26AS.
Step 5 – Report Exempt Pension Income:
For commuted pension (tax-exempt portion):
Navigate to the section ‘Nature of Exempt Allowance.’
Select ‘Section 10(10A) – Commuted Value of Pension Received.’
Enter the exempt commuted pension amount here.
Step 6 – Report Taxable Portion of Pension:
If any portion of the pension is taxable, enter it as ‘Annuity Pension’ under ‘Salary under Section 17(1)’ of the Income Tax Act, 1961.
Step 7 – Verify and Cross-Check Information:
Ensure all TDS details match with Form 16 and Form 26AS.
Double-check entries for exempt and taxable portions to avoid discrepancies.
Step 8 – Submit and Verify ITR:
After completing the details, submit your ITR and e-verify it using Aadhaar OTP, net banking, or other available methods.
Conclusion
Understanding the tax implications of pension income is crucial for effective tax planning. While commuted pensions may offer exemptions, uncommuted and family pensions attract specific tax liabilities. By correctly reporting pension income and claiming eligible deductions, taxpayers can optimize their financial outcomes. If in doubt, consulting a chartered accountant can provide clarity and help with compliance.
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