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Income Tax on Pension: Are Pensions Taxable?

Introduction

In Income Tax Returns, Pension is taxable under the head salaries. Pensions are generally paid every month. However, one may also receive a pension as a lump sum instead of a periodical payment. A lump sum pension is called a commuted pension. The Budget 2023 allowed a standard deduction of family pension under the new tax regime of INR 15,000 or 1/3^rd of the pension amount, whichever is lower. In budget 2022, senior citizens were exempt from filing income tax returns. This exemption is only applicable if pension income and interest income are the only annual source of income. In this regard, section 194P was inserted to impose the banks to deduct tax on senior citizens above 75 years of age who have only Pension and interest income from the bank.

Commuted and Uncommuted Pension

The employer and the taxpayer contribute together to an annuity fund, which in turn pays the taxpayer’s Pension out of the fund. While retiring, one may choose to receive a certain percentage of your Pension in advance. The Pension received in advance is called a commuted Pension. For example, at the age of 60 years, one may choose to receive 10% of the monthly Pension worth INR 10,000 for the next 10 years in advance. This will be paid in a lump sum. Therefore, 10% of INR 10,000x12x10=INR 1,20,000 is the commuted Pension. INR 9,000 will be received for the next 10 years until the person turns 70, and after 70 years of age, you will be paid the full pension amount of INR 10,000.

Whereas uncommuted Pension is the Pension received as periodic payments, i.e., monthly.

Taxability of Commuted and Uncommuted Pension

• Periodic payment of Pension and uncommuted Pension is fully taxable as salary.
• A lump sum or commuted Pension received by government employees is exempt from taxes. However, Lumpsum or commuted Pension received by the non-government employee is partially exempt depending upon whether the person also receives gratuity:
• If a person receives both gratuity and Pension and 100% of the Pension is commuted, then 1/3^rd of the amount of the Pension is exempt, and the remaining is taxed as salary.
• Whereas if a person receives only a pension but not a gratuity and 100% of the Pension, then ½ of the pension amount is exempted.

Reporting Pension Income in ITR

• In ITR-1, go to ‘General Information’, then ‘Nature of Employment’, then ‘Select Pensioners’. There are four types of Pensioners: i. Central Government (CG)- Pensioner, State Government (SG) – Pensioner, PSU – Pensioner and Other Pensioner.

• In other ITRs, you have to go to the salary schedule. Select ‘Nature of Employer’ as “Pensioner”. Pension income taxed as ‘salary income’ has to be reported by stating the name, address, tax collection account number (TAN) of the employer, and the tax deducted (TDS) thereon.

• The Pension exempted is reported as a ‘Commuted Pension’ as per ‘Section 10 (10A) – Commuted value of pension received’ under the ‘Nature of Exempt Allowance’ stating the amount of commuted Pension. The excess amount is reported as an ‘Annuity Pension’ under ‘ Salary in Section 17(1) of the Income Tax Act, 1961.

Pension Received by a Family Member

Pension received by any family member is taxed under the head ‘income from other sources’ in the family member’s ITR. However, if the Pension is commuted or is a lump sum payment, it is non-taxable. Further, an uncommuted Pension given by a family member is exempt to an extent, i.e., INR 15000 or 1/3^rd of the uncommuted Pension received, whichever is less.

For example, – If a family member receives a pension of INR 1,00,000. The exemption available is INR 33,333, i.e., 1/3^rd of INR 1,00,000 or INR 15,000, whichever is less. Therefore, the taxable family pension would be INR 85,000 (INR 1,00,000 – 15000).

Pension received from UNO

Pension received from UNO by its employees or their family members is exempt from tax. Pension received by family members of the armed forces is also exempt.

Filing your Pension Income in ITR

1. The first step is to determine the type of pension income received and its taxability.
2. Then, obtain Form 16 or Form 16A, containing details of the TDS deducted from your pension income.
3. They calculate the gross taxable pension income and add it to your income.
4. Then, apply the income tax slab rates in order to calculate your tax liability.
5. Then, use Form 26AS to reconcile your TDS with the tax payable.
6. Then, fill in the details in the relevant section of the ITR form (ITR1 or ITR 2)¹.
7. The last step is to file your return before the due date.

Conclusion

In summation, pensions is taxed under the head salaries and is mostly paid on a monthly basis. However, one may choose to receive a pension on a lumpsum basis, which is also called a commuted Pension.

FAQs

1. https://incometaxindia.gov.in/Pages/downloads/income-tax-return.aspx