Taxability of Pension: Is Pension Taxable?

Income Tax

Is pension taxable? That’s the question that we have found many pensioners asking in different forums. So, we decided to clear the air for you.

Just so you know, tax implications are applicable for pension under the category of salary income in ITR. Pensions are disbursed periodically, usually each month. However, taxpayers can get their pensions in one go instead of regular payments. 

Do you want to get insights on  pension taxability? Keep reading!

Also read: Section 234F of Income Tax Act

Mode of Availing Pension

A taxpayer and an employer participate in an annuity fund, and the taxpayer receives a pension from the fund. During retirement, individuals can get a specific percentage of their pensions in advance. Receiving this amount in advance is known as commuted pension. 

Here’s an example:

Mr Singh, aged 60 years, decides to obtain 5% of his monthly pension ahead of time for the upcoming 5 years. The amount of pension per month is Rs. 12,000. He will receive a lump-sum payment. Therefore, commuted pension = 5% of Rs. (12,000 x 12 x 5) = Rs. 36,000. He will be receiving Rs. 11,400 (95% of Rs. 12,000) as uncommuted pension for the upcoming 5 years until he is 65. After 65, he will be paid Rs. 12,000 as the monthly amount. 

Uncommuted and Commuted Pension Taxability

• Periodic payment or uncommuted amount is fully taxable, just as salary. For the above example, Rs. 11,400 of Mr Singh’s pension is fully taxable. His pension amount of Rs. 12,000 after 65 years of age is also fully taxable. 
• Lump-sum payment or commuted amount gets tax exemptions in some situations. The amount is eligible for a full exemption for government employees and a partial exemption for other employees. 
• If a taxpayer receives gratuity along with pension, the exemption equals one-third of the amount that he/she would be receiving in case of 100% commutation of pension.
• When a taxpayer doesn’t receive gratuity, the exemption equals half of the amount that he/she would be receiving in case of 100% commutation of pension.       

Filing Pension in ITR

For pension taxability, you must file ITR every financial year. Here’s how to report pension income while filing ITR: 

• In the income tax return, you must select ‘Pensioners’ under ‘Nature of Employment’ in the salary income schedule.
• When the tax liability of pension is the same as that of salary, you must specify TDS, employer’s TAN, address and name thereon. 
• The amount on which one will receive tax exemption should be termed as ‘commuted pension’.
• Any additional amount should be specified as ‘annuity pension’ u/s 17(1) of the IT Act, 1961.
• The commuted pension (subject to tax exemption) should be mentioned in the ‘Any Other’ field under ‘Nature of Exempt Income’. The commuted amount and its details must be entered under ‘Description’.

Pension Taxability for Family

When a family member receives a pension, he/she will be paying tax under the category of other ‘Income from Other Sources’. The following tax implications will be applicable in a family member’s tax return:

• A commuted amount is not taxable
• An uncommuted amount is partially taxable. The exemption applies to one-third of the pension amount or Rs. 15,000, whichever is lesser. 

For instance, Mr Sharma’s wife gets a pension worth Rs. 90,000. Exemption offered will be the least of Rs. 30,000 (one-third of Rs. 90,000) or Rs. 15,000. So, the tax liability on pension for Mr Sharma’s wife will be Rs. 75,000 (Rs. 90,000 – Rs. 15,000).  

Pension under UNO

Tax exemption on a pension is available for UNO employees and their family members. The pension received by a family member of an individual in the armed forces is also tax-exempt.

Also read: Section 44AE of Income Tax Act

Final Word

An employer may offer pension to an individual after retirement. Taxpayers can also start investing in a pension policy to ease the financial burden after retirement. Section 80CCD and Section 80CCC provide deductions for investing in pension schemes. Before e-filing tax returns, pension taxability must be computed as per the Income Tax Department. 

Frequently Asked Questions

Does a taxpayer get Form 16 for pension income?

Yes, taxpayers can obtain Form 16 from their previous employers or from the banks processing their payments. Form 16 refers to a certificate issued to employees by their employers. It provides information about an employee’s salary and the amount of TDS deducted by his/her employer.   

Should taxpayers file ITRs on their pension amounts?

When an individual’s yearly pension amount is above Rs. 2,50,000, he/she must file ITR. For senior citizens (aged 60 and above), the exemption limit amounts to Rs. 3,00,000. Super senior citizens (aged 80 and above) get an exemption limit of Rs. 5,00,000.  

What does Section 80C offer?

Section 80C allows a tax deduction of Rs. 1,50,000 from an assessee’s total earnings during each financial year. HUFs and individuals can avail of this tax benefit. The deductions are available for investments PPF, ELSS funds, EPF, ULIP, etc. 

What does Section 80CCD(1) cover?

Section 80CCD(1) includes deductions for an individual’s contribution towards the National Pension Scheme. The maximum deduction limit will be the least of:

• Rs. 1,50,000 
• 20 percent of gross income for self-employed individuals
• 10 percent of salary for an employee

What does Section 80GG of the Income Tax Act contain?

Section 80GG offers a deduction for rent payable only when House Rent Allowance (HRA) is not available. However, the following conditions are applicable for deduction:

• Taxpayers and their family members should not own any residential property at the location of work. 
• An individual should not be having a self-occupied property in any other area. 

What does Section 80D contain?

Section 80D allows a tax deduction of Rs. 25,000 on insurance of taxpayers and their family members. HUFs and individuals are eligible for this tax benefit. An extra deduction of Rs. 25,000 (maximum) is applicable for parents aged below 60 years.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.