Pension: Income Tax on Commuted and Un commuted Portion

| 3 years ago

The word “Pension” utters a great relief after passing of a substantial period of your life and its importance should be felt from day one of your adult life.

Pension scheme gives an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement.

Pension

We should plan our pension in an effective way so that in future you can have a decent financial support. So let’s start:-

There are four type of pension from the view of taxability-

  1. Exempted Pension
  2. Un-commuted pension
  3. Commuted pension

I. Exempted Pension

There are very few pension income which are exempted from tax. These are

  1. Pension from UNO
  2. Pension received by the family of a dead armed force personnel
  3. Commuted Pension by Govt. Employee
  4. Commuted Pension by Family Member
  5. Pension received by the family other than armed force personnel up to lower of, Rs.15000 or 1/3 of annual pension.

Example for point #5:

Late Mr. Kapoor’s family received a monthly pension of Rs.60,000 i.e Rs.7,20,000/- per annum.

In this case, the pension of Rs.15,000 [lower of 15k or 1/3rd of 7.2 lakh] will not be taxable. The remaining pension of Rs.7,05,000 will be taxable under the head Income from other sources.

 

II. Un-commuted Pension

It is a periodic payment of pension. For instance, X gets a monthly pension of Rs.45,000. It is taxable as salary.

For the assessment year 2018-19, a pensioner who is a resident but not an ordinarily resident having Income from Salaries/pension, one house property, other sources (Interest etc.) and having total income upto Rs.50 lakh can file income tax return if ITR 1 if his total income is up to Rs.50 lakh. For offline ITR forms, Click- Here

 

III. Commuted Pension

It is lump sum payment in exchange for periodical payment. It is exempted in the hands of a government employee.

In other cases, it will be taxable to the extent of :

  1. Commuted pension  less 2/3rd of total commuted value [If gratuity received]; or
  2. Commuted pension  less 1/2 of total commuted value [If gratuity is not received]

Example:

Mr. X is eligible for a monthly pension of Rs.45,000/-. As per service rules, he can get 40% of his pension commuted.

Due to commutation, he will receive a lump sum of Rs. 18,00,000 (calculated on the basis of the period of service-ignore the calculation)

After commutation, he will receive Rs.27,000/- (45000 x 60%) as monthly pension which will be fully taxable.

If Mr. X is a government employee then the whole commuted pension (Rs. 18 lakh) shall be exempted from tax.

However, if Mr.X is a non-govt employee, the following needs to be considered-

If Gratuity received 1/3 of normal pension shall be exempted.
Solution
Commuted value 18,00,000
Commuted value of full pension 1800000/0.40 45,00,000
If X receives gratuity
Amount exempted(1/3 of commuted full pension) 4500000*1/3 15,00,000
Taxable commuted pension 1800000-1500000 300000

OR

If Gratuity is not received 1/2 of normal pension shall be exempted.
Solution
Commuted value (75% of normal pension) 18,00,000
Commuted value of full pension 1800000/0.40 45,00,000
If X doesnot receives gratuity
Amount exempted(1/2 of commuted full pension) 45,00,000*1/2 22,50,000
Taxable commuted pension 180000-22,50,000 0

 

 In respect of  Family pension received in arrears by any family member on the death of an employee, the recipient can claim tax relief under section 89.

 

Frequently Asked Questions [FAQ]

Ques 1: I have invested in a pension plan of LIC named LIC Jeevan Suraksha. Is it taxable?

Ans: Yes, this pension is taxable under the head Income from other sources.

Ques 2: I have received the pension from the EPF contribution. Is it taxable and can I get the standard deduction for AY 2018-19?

Ans: Yes, this pension is taxable under the head Income from Salary and a standard deduction of Rs.40,000/- is available in the financial year 2018-19.

If the pension was from an NPS scheme than it would have been taxed as income from other sources and the standard deduction would not have been allowed.

 

Happy Learning!

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