Are Pensions Taxable?

Budget 2021 update :It has been proposed to exempt the 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.

1. Introduction

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. 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 decide to receive 10% of your monthly pension in advance for the next 10 years worth Rs 10,000. This will be paid to you as a lump sum. Therefore, 10% of Rs 10000x12x10 = Rs 1,20,000 is your commuted pension. You will continue to receive Rs 9,000 (your un-commuted pension) for the next 10 years until you are 70 and post 70 years of age, you will be paid your full pension of Rs 10,000.

2. 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 pension or lump sum received may be exempt in some instances. For a government employee, commuted pension is fully exempt. For a non-government employee, it is partially exempt. If gratuity is also received with a pension – 1/3rd of the amount of pension that would have been received if 100% of the pension was commuted, is exempt from commuted pension and remaining is taxed as salary. And in case, only a pension is received, gratuity is not received – ½ of the amount of pension that would have been received if 100% of the pension was commuted is exempt.
  

 


3. Report pension income in ITR

How to report pension income and employer details in the income tax return? In the ITR, you have to choose the ‘Pensioners’ option in the field ‘Nature of Employment’ under the salary schedule. 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 specific limit on the pension amount exempt from income tax must be reported as ‘Commuted Pension’. Any excess amount must be reported as ‘Annuity Pension’ under ‘Salary under Section 17(1)’ of the Income Tax Act, 1961.



The commuted pension, exempt from taxes, must be entered in the field ‘Commuted value of pension received under Section 10(10A)’ under the ‘Allowances to the extent exempt under section 10’.



4. Pension received by a family member

Pension received by a family member is taxed under 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. Uncommuted pension received by a family member is exempt to a certain extent. Rs 15,000 or 1/3rd of the uncommuted pension received – whichever is less is exempt from tax.


 
• F For example – If a family member receives a pension of Rs 1,00,000, the exemption available is least of – Rs 15,000 or Rs 33,333 (1/3rd of Rs 1,00,000). Thus the taxable family pension will be Rs 1,00,000 – Rs 15,000 = Rs 85,000
  

5. Pension that is received from UNO

Pensions that are received from UNO by its employees or their family is exempt from tax. Pension received by family members of 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.

and we will assist you.

Frequently Asked Questions

How is pension income taxed?


Pension income gets taxed as income from salary.

Is pension eligible for standard deduction given for salary income?


You can claim the standard deduction given for salary income on pension income taxed as income from salaries.

Will I receive a Form 16 on pension income taxable as salary?


You will receive Form 16 from your former employer or the bank making the remittance.

Should I file an income tax return on my pension income?


You need to file a return if your annual pension income exceeds Rs 2.5 lakh. In case of senior citizens of the age of 60 or above, the limit is Rs 3 lakh. And, in the case of super senior citizens of the age of 80 and above, the limit is Rs 5 lakh.

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