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Tax treatment of PENSION [Monthly and Commuted] for Computing Salary Income [Section 17(1)(ii)]

Pension is a payment made by the employer after the retirement/death of the employee as a reward for past service.

Pension is normally paid as a periodical payment on monthly basis but certain employers may also allow an employee to forgo a portion of the pension and receive a lump sum amount by surrendering such portion of pension. This is known as commutation of pension. The pension may be fully or partly commuted i.e. in lieu of the pension, a lump sum payment is made to the employee. The treatment of these two kinds of pension is as under:

  • Uncommuted pension i.e. the periodical pension: It is fully taxable in the hands of all employees, whether government or non-government.
  • For instance, X gets monthly pension of Rs. 2,000. It is taxable as salary under section 15 in the hands of a Government employee as well as nonGovernment employee.

  • Commuted pension: Exemption of Commuted Pension U/s 10(10A)
Status of Employee

Gratuity Received / Not Received

Exemption in respect of Commuted Pension under Section 10(10A)
Govt. employees, employees of local authorities and employees of statutory corporations Gratuity may or may not be Received Entire Commuted Pension is Exempt from Tax.
Non-Government Emplopyee Gratuity Received

1/3 rd of the Pension which he is normally entitled to receive is Exempt from tax.

Non-Government Emplopyee Gratuity is Not Received

1/2 of the Pension which he is normally entitled to receive is Exempt from tax.

If payment in Commutation of Pension received by an employee exceeds the aforesaid limits, such excess is liable to tax in the assessment year relevant to the previous year in which it is due or paid. The assessee can, however, claim relief in terms of section 89.

PENSION [Monthly and Commuted] for Computing Salary Income [Section 17(1)(ii)]

Note :

  1. Pension received by the employee is taxable under the head "Salaries".

  2. Pension is received from UNO by the employee or his family members : It is not chargeable to tax

  3. Family pension received by the family members of armed forces : It is exempt under section 10(19) in some cases.

  4. Family pension received by the family members after the death of an employee : It is taxable in the hands of recipients under section 56 under the head “Income from other sources”. Standard deduction is available under section 57 which is 1/3 of such pension or Rs. 15,000, whichever is lower.

Contents : Salary Income
 

 Important Links....for calculating Salary Income

(A). Salary -Definition & Meaning
(B). Provident Fund
(C). Allowance
(D). Perquisites
(E). Profit in lieu of Salaly
(F). Retirement Benefits
(G). Deductions
(H). Table Presentation of Salary Income (Section 15 to 17)



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