Pensions serve as a source of a monthly income given to retired persons. Such individuals have the choice of requesting the entire annual pension or receiving it on a monthly basis. When they receive the annual pension together, i.e. once a year, it is defined as a commuted pension. The pension received on a monthly basis is termed an uncommuted pension. However, there have been recent developments on this subject matter. According to section 194P of the income tax, if a pension constitutes the sole source of revenue for retired individuals, they do not face any tax liability. This has come into effect from April 1, 2021. However, this applies to those senior citizens who fulfil specific requirements. They are Indian residents, have to be 75 years or older, and are the recipients of a pension and interest on the pension accrued in the bank which furnishes the pension. These details have to be provided to the bank for validation. Let us explore the different aspects of pensions and what specific conditions make pensions taxable.
Did you know? You can avail of double family pensions if both your parents have been central government employees, but after you fulfil certain conditions.
What Constitutes Commuted and Uncommuted Pension?
Many organisations include a pension plan as a part of their benefits offerings to employees. This involves a consistent and timely contribution from the employer and employee to a distinct investment portfolio. An investment professional manages this portfolio. A commuted pension comes into effect through a pension plan. This type of pension is a certain amount of income to which pensioners are entitled either on a monthly basis or a lump sum basis. The amount is an approximate sum and is estimated in accordance with the life expectancy of the recipient. The concerned pension fund managers calculate commuted pension. This calculation helps them understand the details of the said payout. There are pensioners who opt out of the monthly pension arrangement and prefer to take their entire pension amount together. This makes them entitled to payment of some specific taxes.
An uncommuted pension entails a payment made at regular intervals to the pensioners. This could be on a monthly, quarterly or annual basis. This type of pension is liable to taxation.
Taxability of Commuted and Uncommuted Pension
- Uncommuted pensions, as well as any other periodic pension payments, are fully taxable as salary.
- In some cases, a commutated or lump-sum pension may be exempt.
- A commuted pension is totally exempt for a (state or central) government employee.
- It is partially exempt for non-government employees.
- If a pension is combined with a gratuity, 1/3 of the amount of the pension that would have been received if the entire pension had been converted is exempt from commuted pension taxation, while the remainder is taxed as pay.
How to Report Pension Income in ITR?
- A starting slab of ₹3 lakhs applies to individuals over 60 years but less than 80 years of age. The tax slabs are reduced to ₹50,000 if the person is more than 80 years of age. Retired senior citizens in this age group with a very nominal income are exempted from tax liabilities.
- All pensioners must resort to the ITR 1 (Sahaj) form for filing returns. This does not apply to those who enjoy a pension amount of more than ₹50 lakhs.
- In the salary schedule, the pensioners can view the section titled ‘nature of employment. Here, they have to select the tab titled ‘pensioners’.
- Form ITR 1, where individuals are the recipients of pension income arising out of the fund towards which contribution is made by employers. In such cases, the employees furnish details of the names, residential/commercial address, amount of tax deducted as well as the collection account number (TAN) of the said employer. In addition to these details, employees also have to furnish details of any LIC or other funds, but only tax deductions have been made on the pension amount.
- The distinct limit on the pension sum is exempted from tax liability. This is referred to as the commuted pension. Any amount that exceeds this is referred to as an ‘annuity pension’.
- Once the commuted pension details are arrived at, they must be keyed in the section titled ‘any other. All relevant details have to be provided here.
Pension Received by a Family Member
The situations under which a family member can receive a pension are listed below:
- Any of the spouses after the death of their respective spouse, namely widower or widow. These individuals can be the recipients of the pension until they decide to marry again or die. The pension benefit is given to widow who is childless, and the income they receive is less than the minimum amount of the family pension they receive
- Taxes on family pensions are levied under the ‘income from other sources’ section in the income tax form.
- Tax is levied on uncommuted family pensions.
- No tax is levied on commuted family pension (bulk amount).
- Employers who pay a regular monthly pension to X family member of an employee who has died is an uncommuted pension. This is exempted from tax up to the amount of ₹15,000 or 1/3rd of the pension – whichever amount is less becomes free of tax liability.
- In the case of paramilitary as well as armed forces, family pension is exempted from taxes when the said individuals have died in the line of duty.
Let’s consider an example of commuted and uncommuted pensions.
- Age of person – 60 years
- Makes request for commuted pension i.e. 10% of pension amount = ₹10,000.
- Commuted pension amount is calculated as – 1000 x 12 x 10 = ₹1,20,000.
- Amount person receives as uncommuted pension - ₹9000 per month for the following 10 years.
- At the end of 10 years, a person’s age = 70 years.
- Pension receivable = ₹10000.
- In this case, the tax is levied on the uncommuted amount of ₹9000 as well as the amount of ₹10000 after the completion of the 10-year cycle as mentioned above.
The Pension that is Received From UNO
Any pension furnished by the United Nations Organisation (UNO) is not levied with any taxes. Those who receive pensions from UNO or their families are exempt from paying taxes on them, and members of the families of the armed forces are also exempt from paying taxes.
This article provides you with clarity on the tax liability that is imposed on a pension amount. It helps understand the different types of pensions and which category gets exemption from tax. The rules of taxation pertaining to pensions are different for central government and non-government employees. Pension is a source of sustenance for many retired senior citizens. There are some pensioners who like to avail of the entire pension sum in order to meet pending obligations. There are others who prefer to receive their pension on a monthly basis. The preferences vary across families and the need of the hour.