Pension is a periodical payment received by an Employee after his retirement and is taxed as salary.
The basis of charging commuted or un-commuted pension is as follows :
>> Uncommuted pension is taxable as salary for both Government and Non-government employees.
>> Any Commuted pension received by an employee of the Central Government, Local Authority or Statutory Corporation is wholly exempted from tax under section 10(10A)(i).
>> Judges of Supreme Court and High Courts are entitled to exemption of commuted pension. Govt. Employees absorbed in a public sector undertaking are entitled to exemption in respect of lump sum received on commutation of pension.
>> Payment in commutation of pension received by any other Employee is exempt from tax:
(i) In case where the Employee receives Gratuity, the commuted value of 1/3 rd of the pension which he is normally entitled to receive.
(ii) In any other case, the commuted value will be half (1/2) of such pension.
>> If payment on commutation of pension receive by the Employee exceeds the above limits, such excess is liable to tax.
>> For Central Government Employees joined on or after 1-1-2004, 10% of Salary is compulsory deducted towards Pension with a matching contribution from the Govt. and is Non-Taxable u/s 80CCD. Only Terminal Benefit is charged to tax.
Now 80CCD is applicable to Non-Govt. Employees also.
>> In respect of Family Pension deduction is allowed to the extent of 1/3 rd of pension or Rs. 15,000 whichever is less.
An employees retires from service on 1-6-2007 and his pension was fixed at Rs.1,200 per month. He commuted Rs.800 out of his pension, and received Rs.98,000 as commuted value of pension.
The exemption admissible will be worked out as follows :
If the employee has received any Gratuity, only commuted value equivalent to one-third of pension (Rs.400) will be exempt. This will work out to :
98,000 X 400/800 = Rs. 49,000
If the employee had not received any Gratuity, only commuted value equivalent to one-half (1/2) of pension (Rs.600) will be exempt. This will work out to :
98,000 X 600/800 = Rs.73,500
If you are a Govt. Employee : Any death cum retirement Gratuity received by an employee of the Central / State Govt. or local authority is wholly exempt from tax.
>> If the employee is covered by the Gratuity Act, any gratuity received under Gratuity Act 1972 is exempted to the extent of whichever is less of the following :
(1) Salary for 15 days based on the salary last drawn for every completed year of service or part there of in excess of 6 months.
(2) Rs. 3,50,000 or Actual Gratuity received.
>> Gratuity received in excess of these limits is taxable (salary includes D.A. but NOT Bonus, Commission, HRA, Overtime Wages or any other allowance).
For other than Government Employees Gratuity received on retirement , death, termination and resignation or on his becoming incapacitated prior to retirement is exempt from tax to the extent of least of the following :
(1) Rs. 3,50,000/-
(2) Half Month’s Salary for each completed year of service
(3) Actual Gratuity received.
Relief of Salary arrears/advance, Gratuity, Pension, Family Pension etc.
Relief is available in respect of arrears / advance received in lump sum, Gratuity for past services of not less than five years, leave encashment , compensation on termination of service, payment in commutation of pension, family pension etc, under rule 21A. The relief can be claimed even if the assesses was not liable to tax and has not been taxed in the relevant previous years to which the salary arrears pertain.
An employee whose monthly wage was Rs.7,800 retired on 30-04-2006, after putting in a service of 36 years, 7 months, and received a Gratuity of Rs.1,50,000.
The exemption is to be computed as follows :
Completed years of service (rounded off) - 37 years
15 days’ wages - 15/26 X 7800 -Rs. 4,500
Amount calculated at 15 days wages - 4500X37 -Rs. 1,66,500(A)
Gratuity actually received -Rs.1,50,000(B)
Maximum limit -Rs.3,50,000(C)
Exemption allowable (least of A, B & C) -Rs.1,50,000