Income Tax on Pension: Are Pensions Taxable?

Pension is taxable under the head salaries in your income tax return. Pensions are paid out periodically, generally every month. However, you may also choose to receive your pension as a lump sum (also called commuted pension) instead of a periodical payment.

Budget 2024 Latest Update

Family Pension deduction is proposed to increase from ₹ 15,000 to ₹ 25,000 for the FY 2024-25. Also standard deduction under the new tax regime has been increased to ₹ 75,000 for the FY 2024-25.

Updates

Budget 2023:
Standard Deduction on family pension under the new tax regime is allowed: Rs 15,000 or 1/3rd of the pension amount, whichever is lower.

Budget 2022:
It has been proposed to exempt senior citizens from filing income tax returns if pension income and interest income are their only annual income source. Section 194P has been newly inserted to enforce the banks to deduct tax on senior citizens more than 75 years of age who have a pension and interest income from the bank.

Commuted and Uncommuted Pension

Generally, the employer and taxpayer contribute together to an annuity fund, which pays the taxpayer pension out of the fund. At the time of retirement, you may choose to receive a certain percentage of your pension in advance. Such pension received in advance is called commuted pension. 

For example, at the age of 60 years, you choose to receive 10% of your monthly pension worth Rs 10,000 of the next 10 years in advance. This will be paid to you as a lump sum. 
Therefore, 10% of Rs 10,000x12x10 = Rs 1,20,000 is your commuted pension. You will receive Rs 9,000 (your uncommuted pension) for the next 10 years until you are 70 and after 70 years of age, you will be paid full pension of Rs 10,000.

Uncommuted pension is the pension received as periodic payments, usually monthly.

Taxability of Commuted and Uncommuted Pension

• Uncommuted pension or any periodical payment of pension is fully taxable as salary. In the above case, Rs 9,000 received by you is fully taxable. Rs 10,000, starting at the age of 70 years, are fully taxable as well.
• Commuted or lump sum pension received by government employee is exempt from taxes.
• Commuted or lump sum pension received by non-government employee is partially exempt depending on whether gratuity is also received by the person:
  • If a person receives both gratuity and pension – If 100% of the pension was commuted, then 1/3rd of the amount of pension is exempt and the remaining is taxed as salary.
  • If a person does not receive gratuity but receives only pension – If 100% of the pension was commuted, ½  of pension amount is exempt.

Note: Exemption in respect of commuted pension is available under both the tax regimes.

Report Pension Income in ITR

How to report pension income and employer details in the income tax return?

• In ITR-1, go to the ‘General Information' > ‘Nature of Employment’ section > Select ‘Pensioners’. Here, there are four types of Pensioners: CG- Pensioners, SG- Pensioners, PSU- Pensioners and Other Pensioners.

• In other ITRs, go to salary schedule and select Nature of Employer as “Pensioners”. Pension income taxable as ‘salary’ has to be reported by mentioning the name, address, tax collection account number (TAN) of the employer and the tax deducted (TDS) thereon. 

• The exempt portion of the pension must be reported as ‘Commuted Pension’ in the field ‘Section 10(10A)- Commuted value of pension received' under the ‘Nature of Exempt Allowance’. Mention the amount of commuted pension. 
  Any excess amount must be reported as ‘Annuity Pension’ under ‘Salary under Section 17(1)’ of the Income Tax Act, 1961.

Pension Received by a Family Member

Pension received by a family member is taxed under the head ‘income from other sources’ in family member’s income tax return. 

• If this pension is commuted or is a lump sum payment, it is not taxable in certain cases. 
• Uncommuted pension received by a family member is exempt to a certain extent. Rs. 25,000 or 1/3rd of the uncommuted pension received – whichever is less is exempt from tax. (This amount of Rs. 25,000 has been increased from Rs.15,000 with effect from FY 2024-25)

For example – If a family member receives a pension of Rs 1,00,000, the exemption available is least of – Rs 25,000 or Rs 33,333 (1/3rd of Rs 1,00,000). 
Thus, the taxable family pension will be Rs.75,000 (Rs 1,00,000 – Rs 25,000)

Pension that is Received from UNO

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

If you have any questions related to tax on pension, reach out to us at support@cleartax.in and we will assist you.

Income Tax Slab under Old Tax Regime for Individuals above 60 years 

Note: Income Tax Exemption limit is up to Rs. 3,00,000 for individuals aged above 60 years but below 80 years & up to Rs. 5,00,000 for individuals aged above 80 years.

Income Tax Slab under New Tax Regime for Individuals

Under the new tax regime, the tax slabs are the same regardless of the age. The Budget 2024 has revised the tax slabs in the New Regime for FY 2024-25, providing taxpayers with an extra opportunity to save Rs. 17,500 in taxes. The comparison between the tax slabs post-budget and pre-budget is as follows: