PENSION AND IT'S TAXABILITY

‘Pension’ is a periodic payment made especially by Government or a company or other employers to the employee in consideration of past service payable after his retirement. Pension is taxable under the head salaries in your income tax return.

Pension is of two types: commuted and uncommuted

Uncommuted Pension

• Uncommuted pension refers to pension received periodically.

Taxability

It is fully taxable in the hands of both government and non-government employees.

Commuted Pension

• Commuted pension means lump sum amount taken by commuting the whole or part of the pension. Many persons convert their future right to receive pension into a lumpsum amount receivable immediately. Suppose a person is entitled to receive a pension of sum 10,000 p.m. for the rest of his life. He may commute ¼th i.e., 25% of this amount and get a lumpsum of say 1,50,000. After commutation, his pension will now be the balance 75% of 10,000 p.m. = 7,500 p.m.

Taxability

Commuted or lump sum pension received may be exempt in some instances :

• Employees of the Central Government/ local authorities/ Statutory Corporation/ members of the Civil Services/ Defence Services: Any commuted pension received is fully exempt from tax.
  
  
• Other Employees: Any commuted pension received is exempt from tax to the extent of the following:
  
  
• If gratuity is also received with a pension : Exemption = 1/3rd of the amount of pension which he would have received. had he commuted the whole of the pension.
   
• If gratuity is not received with a pension : Exemption = ½ of the amount of pension which he would have received had he commuted the whole of the pension.

Note : Exemption shall be to the extent it is allowed to be commuted and the balance uncommuted Pension received periodically will be fully taxable