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Income Tax on Pensions

by | May 5, 2024 | Income Tax | 0 comments

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Important Keyword: Income from salary, Income Tax, Pension Income.

Income Tax on Pensions

Pensions is a regular payment made by an employer to a retired employee as consideration for their past service. It is categorized as taxable income under the head “Income from Salary”. However, pensions received from certain sources are exempt from tax, such as pensions received from the United Nations or by family members of armed forces personnel.

In a recent development, Section 194P of the Income Tax Act provides an exemption from filing income tax returns for specified senior citizens aged 70 or above. This exemption applies if their sole source of income is pension and interest income from banks, and they declare this to the specified banks. In such cases, the banks deduct TDS on their income.

Commuted and Uncommuted Pensions

Employees have the option to receive a portion of their pension in advance upon retirement, known as commuted pension. This advance payment is provided as a lump sum amount. For instance, if an individual is entitled to a monthly pension of INR 10,000, and chooses to receive 25% of it in advance for the next 10 years, the commuted pension amount would be INR 3,00,000.

For government employees, commuted pension is entirely exempt from taxation. However, for non-government employees, it enjoys partial exemption.

Uncommuted pension, on the other hand, refers to periodic payments received by the individual. In the example provided, the individual would continue to receive INR 7,500 per month (75% of the pension) for the next 10 years, after which the full pension amount of INR 10,000 per month would be paid.

Tax treatment of commuted and uncommuted pensions varies:

  • Uncommuted pension or any periodic pension payments are fully taxable under the head “Income from Salary”.
  • Commuted pension may be exempt under certain conditions:
    • For government employees, commuted pension is fully exempt.For non-government employees, it is partially exempt.1/3rd of the pension amount that would have been received if 100% of the pension was commuted, is exempt, and the remainder is taxed as salary.1/2 of the amount of pension that would have been received if 100% of the pension was commuted, is exempt from taxation.
    If gratuity accompanies the pension: If only pension is received without gratuity:

Income Tax on Pensions received by Family Member

Pension received by the family member of a deceased employee is categorized as taxable income under the head “Income from other sources”. However, commuted or lump-sum payments of family pension are not taxable.

Uncommuted pension received by a family member enjoys an exemption up to the lesser of INR 15,000 or 1/3rd of the uncommuted pension received.

For instance, if a family member receives a pension of INR 50,000, the exemption will be INR 15,000 (the lower of INR 15,000 or INR 16,665, which is 1/3rd of INR 50,000). Consequently, the taxable family pension will be INR 35,000 (50,000 – 15,000).

How to report income from Pensions in ITR?

When filling out the ITR-1 form, you’ll encounter a section called “Nature of Employment” in the general information section. Within this section, you must select the appropriate category of Pensioners. There are four categories available:

  1. CG- Pensioners: Refers to Central Government Pensioners.
  2. SG- Pensioners: Denotes State Government Pensioners.
  3. PSU- Pensioners: Represents Pensioners from Public Sector Undertakings.
  4. Other Pensioners: Covers individuals receiving pension from other sources not specified in the above categories.

In contrast, when filling out other ITR forms, such as ITR-2, ITR-3, etc., you’ll find the “Nature of Employer” option under the salary schedule. Here, you need to select “Pensioners” to indicate that you’re a pensioner receiving pension income taxable as ‘salary’.

Additionally, you must provide details such as the name, address, tax collection account number (TAN) of the employer (in this case, the organization from which you’re receiving pension), and the corresponding TDS (Tax Deducted at Source) information.

When reporting pension income on your income tax return, ensure to enter the tax-exempt portion of the pension in the field labeled ‘Commuted value of pension received under Section 10(10A)’ within the ‘Allowances to the extent exempt under section 10’ section. Any amount exceeding the tax-exempt portion should be reported as ‘Annuity Pension’ under the ‘Salary under Section 17(1)’ section. This clear categorization helps in accurately reflecting the taxable and exempt portions of your pension income.

Read More: Tax on Gratuity

Web Stories: Tax on Gratuity

Official Income Tax Return filing website: https://incometaxindia.gov.in/

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