PENSION

   

Pension is a payment made by the employer after the retirement/ death of the employee as a reward for past services, following table gives a broad tax treatment of pension:-

Case

Particulars

Tax treatment

Case 1

Pension is received from UNO by the employee or his family members

It is not chargeable to tax

Case 2

Family pension received by the family members of armed forces (after the death of the employee)

It is exempt under section 10 (19) in some cases.

Case 3

Family pension received by the family members of other cases  (after the death of the employee)

It is taxable in the hands of recipients under section 56 under the head “income from other sources”. Standard deduction is available under section 57 which is 1/3 of such pension or Rs. 15000, whichever is lower.

Case 4

Pension received by an employee (during his lifetime) in any other cases.

Tax treatment depends on whether Pension is Commuted or Uncommuted (Refer Below).

  • Uncommuted pension whether received by a Govt. or a Non Govt. employee is chargeable to tax in both cases

  • However Commuted pension in case of Govt. is fully EXEMPT from tax but in case of Non Govt. employee is exempt on following basis:

  Situation

Tax Exemption available

If Gratuity is received

One-third of the pension, which he is normally entitled to receive, is exempt.

If Gratuity is not received

One-half of the pension which he is normally entitled to receive is exempt.

ILLUSTRATION

  • A retires from services of XYZ Ltd. on May 31, 2009. He gets pension of Rs. 15,000 per month up to December 31, 2009: (i.e. Rs. 15,000 × 7). With effect from January 1, 2010, he gets One Third of his pension commuted for Rs. 10,00,000 and is not in receipt of Gratuity. 

  • While uncommuted pension is chargeable to tax, commuted pension is exempt from tax in the case of Government Employees. Therefore, pension of Rs. 10,00,000 is exempt from tax. The amount of uncommuted pension will be calculated as under:

                                                                                                            Rs.

Uncommuted pension up to                                 105000          

December 31, 2009 (i.e. Rs. 15000 × 7)                                                                   

Uncommuted pension from January 1, 2010            30,000

to March 31, 2011 (i.e. 2/3 × 15,000 × 3)                                                                                       

Total Uncommuted pension chargeable to tax         1,35,000 

as salary