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, 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 armed forces is also exempt.
Employees may choose to receive a certain percentage of their pension in advance at the time of retirement. Suchpension received in advance is called commuted pension. This is payable as a lump sum amount. For example, a person has entitled to INR 10000 pm. He/She may decide to receive 25% of his monthly pension in advance for the next 10 years worth INR 10,000. Therefore, 25% of INR 10000x12x10 = INR 3,00,000 is your commuted pension.
Commuted pension is fully exempt for a government employee. However, for a non-government employee, it is partially exempt.
A non-government employee who receives pension along with gratuity, 1/3rd of the 100% of the commuted pension is exempt. Balance is taxable under the salary head.
A non-government employee receiving only a pension and not a gratuity, 50% of the 100% of the commuted pension is exempt.
Uncommuted pension refers to periodic payments received by the individual. Any amount received as Uncommuted Pension is fully taxable in the hands of both government and non-government employees.
Uncommuted pension or any periodical payment of pension is fully taxable as salary.
Commuted or lump sum pension received may be exempt in some instances.
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 remaining is taxed as salary.
And in case the only pension is received and gratuity is not received – ½ 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 monthly 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 ).
While filing ITR-1 you have to choose the ‘Pensioners’ option in the field ‘Nature of Employment’ under the general information section.
Whereas in other ITR’s nature of employer is as “Pensioners” in 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.
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 excess amount as ‘Annuity Pension’ under ‘Salary under Section 17(1)’