The employer pays the employee a certain amount regularly in consideration of his past service. These periodic payments are Pension. Pension is taxable under the head “Income from Salary“. Further, the pension received by a family member of the deceased employee is taxable under the head “Income from other sources.”
Pensions received from UNO by its employees or their family is exempt from tax. Pension received by family members of the armed forces is also exempt.
As per Section 194P of the Income Tax Act, a specified senior citizen of age 70 or more is exempted from ITR filing provided they do not have any other source of income except pension income and interest income from the bank. They have to give such declaration to the specified banks so that the bank can deduct TDS on their income.
Commuted and Uncommuted Pension
- Employees may choose to receive a certain percentage of their pension in advance at the time of retirement. Such pension received in advance is called commuted pension. This is payable as a lump sum amount.
For example, a person has entitled to INR 10,000 pm as a pension. They may decide to receive 25% of their monthly pension in advance for the next 10 years worth INR 10,000. Therefore, 25% of INR 10000x12x10= INR 3,00,000 is the commuted pension.
- Commuted pension is fully exempt for a government employee. However, for a non-government employee, it is partially exempt.
- Uncommuted pension refers to periodic payments received by the individual. In the above-mentioned example, INR 7,500 p.m. (10,000*75%) will be their uncommuted pension which they will continue to receive for the next 10 years post that full pension of INR 10,000 p.m. will be paid.
Tax treatment of Commuted and Uncommuted Pension
- Uncommuted pension or any periodical payment of pension is fully taxable under the head Income from Salary.
- Commuted or lump sum pension received may be exempt in some cases.
- For a government employee, commuted pension is fully exempt.
- For a non-government employee, it is partially exempt.
- If gratuity is also received with a pension – 1/3rd of the amount of pension that would have been received, if 100% of the pension was commuted, is exempt from commuted pension and the remaining is taxed as salary.
- And in case the only pension is received and gratuity is not received – 1/2 of the amount of pension that would have been received, if 100% of the pension was commuted, is exempt.
Income Tax on Pension received by Family Member
Pension received by the family member of the deceased employee is taxable under the head income from other sources. Commuted or lump-sum payment of family pension is not taxable.
Uncommuted pension received by a family member is exempt to the extent of INR 15,000 or 1/3rd of the uncommuted pension received – whichever is less.
For example, a family member receives a pension of INR 50,000/-. So the exemption will be INR 15,000/- [lower of INR 15,000/- or INR 16,665/- (INR 50,000*33.33%)]. Thus, the taxable family pension will be INR 35,000/- (50,000 – 15,000).
How to report income from Pension in ITR?
- While filing ITR-1 you have to choose the category of Pensioners in the field ‘Nature of Employment’ under the general information section. There are four categories of Pensioners: CG- Pensioners, SG- Pensioners, PSU- Pensioners and Other Pensioners.
- Whereas in other ITRs, Nature of Employer as “Pensioners” is to be selected from the salary schedule. Therefore, pension income taxable as ‘salary’ has to be reported by mentioning the name, address, tax collection account number (TAN) of the employer and the TDS thereon.
- The amount of the pension to the extent tax-exempt must be entered in the field ‘Commuted value of pension received under Section 10(10A)’ under the ‘Allowances to the extent exempt under section 10’. We have to report the excess amount as ‘Annuity Pension’ under ‘Salary under Section 17(1)’
The pensioners are liable to pay income tax on their pension if their total income exceeds the maximum exemption limit.
If you are a pensioner, the bank through which you are receiving your pension will issue Form 16.
Hence pension paying branch is bound to give Form 16 for the period and thereafter.
Yes, a Standard deduction of INR 50,000/- is available against income from Pension.
Pension is taxable under the head of “Income from Salaries” in the ITR. However, Family Pension is taxable under the head of “Income from Other Sources”.
As per section 139 of the Income Tax Act, it is not mandatory to file the ITR if your gross income is below the basic exemption limit. However, when the gross income of a specified senior citizen is more than the basic exemption limit then they can claim relief and not file ITR under section 194P is all specified conditions are fulfilled.