written by | June 28, 2022

Are Pensions Taxable in India?

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Table of Content


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?

Commuted 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.

Also Read: Tax Audits in India - Learn About Income Tax Auditing And It's Types

Uncommuted Pension

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.

Also Read: How to Pay Professional Tax Online - Exemption, Due Dates & Penalties

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.

Conclusion:

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.

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FAQs

Q: What is the meaning of commuted and uncommuted pension?

Ans:

The pension can be availed of in two ways. You can request to receive the said amount at monthly intervals. This could be on a monthly, quarterly, or even a half-yearly basis. You can also be the recipient of the entire sum. When you choose to obtain the entire pension amount, it is referred to as commuted pension. When you prefer to receive the pension at the end of each month, it is referred to as an uncommuted pension. This is treated as a salary, and you are responsible for paying taxes on the said amount. There are various laws governing pensions. The government is attempting to smoothen the creases so that pensioners are able to enjoy optimal relief from taxes.

Q: Explain income tax returns for pensioners?

Ans:

Recipients of pensions do not have to pay income tax necessarily. If the amount they receive is more than the minimum pension amount, they have to pay taxes. There are various rules which are applicable to different categories of pensioners. As per the 2021 Union budget, the finance minister affirmed that those aged more than 75 years will not have to bear the burden of income tax.

Q: Why is there a tax on pensions?

Ans:

Taxes are not levied on all pensions. For individuals who have served in the paramilitary forces or even the armed forces, a family pension is exempted from payment of taxes. This applies only if the person died in action, i.e. service to the nation. There are various conditions which regulate the payment of taxes.

Q: Is pension income taxable?

Ans:

Pensions are taxable but are dependent on the source and the manner in which it is availed of. The rules for government employees are different from the ones which apply to non-government employees. Employees who receive their pension from the United Nations Organisation are exempted from payment of income tax. If you are a pensioner who desires to receive your pension at the end of each month, you will have to pay taxes.

Q: Explain income tax on pension?

Ans:

Pensioners can avail of their pension in two ways. They can withdraw the entire amount, e.g. to meet medical expenses or choose the option of receiving it on a monthly basis. Pension received in this manner comes under the heading of ‘salaries’ as per the 1961 income tax act and is taxed.

Q: A pension is taxable under which head?

Ans:

You will find a tab titled ‘salaries’ in your income tax returns. Every pension that appears under this section is levied with taxes.

Q: Are pensions taxable?

Ans:

All pensions are not taxable. There are two categories of pension, commuted and uncommuted. The commuted category involves availing of the entire pension sum. The uncommuted category involves receiving a pension on a monthly basis, and taxes are levied on this.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.