Income Tax on Pensions: Are They Taxable?
Pensions are fixed sums of money that you receive at regular intervals after your retirement. Since they’re essentially a source of income, they’re subject to tax as salaried income as per the Income Tax Act, 1961. However, the taxability of pensions may vary depending on the type of pension that you’ve chosen to receive after retirement.
If you’re about to reach your retirement age, or if you are already receiving pension income, you need to be aware of how it is treated under the Income Tax Act. Here’s a comprehensive guide explaining income tax on pensions.
What are Commuted and Uncommuted Pensions?
When you retire, you’re usually given the option to choose between uncommuted and commuted pension.
If you choose to receive a commuted pension, a percentage of the pension fund contributed by you and your employer is paid out in advance as a lump sum amount. The remaining amount in the pension fund is then paid out to you in fixed instalments at regular intervals throughout your life. Since a large portion of the pension fund is already paid out to you in advance, the amount of pension you receive in each instalment will be lower in this case.
For example, if your pension fund amounts to Rs. 1 crore and you choose to commute 40% of this sum, you will receive Rs. 40 lakhs upfront. The remaining Rs. 60 lakhs will be used to make regular pension payouts.
On the other hand, when you choose to receive an uncommuted pension, the entire pension fund is used to provide you with a fixed sum of money at regular intervals for life. You don’t receive any lump sum amount in this case.
How Are Commuted and Uncommuted Pensions Taxed?
Now that you’ve seen the two different types of pensions, let’s take a look at how they’re each taxed.
Taxability of Uncommuted Pension
The uncommuted pension payments you receive from your previous employer are classified as ‘Income from Salaries’ under the Income Tax Act, 1961, and are taxed at the slab rate applicable to you.
Taxability of Commuted Pension
If you’re a government employee, the commuted part of the pension (the lump sum amount) that you receive will be exempt from tax. However, the regular pension payouts you receive thereafter will be fully taxable under the head ‘Income from Salaries’.
If you’re a non-government employee, the income tax on your pension will vary depending on whether or not you receive gratuity payments along with your pension.
If you receive gratuity along with your pension
One--third of the commuted pension is tax-free, whereas the remaining two-thirds is fully taxable under the head ‘Income from Salaries’.
If you only receive a pension
50% of the commuted pension will be tax-free, whereas the remaining 50% will be fully taxable as salaried income.
Taxability of Pension from Life Insurance Companies
- Regular Pension from Pension or Annuity plans of Life Insurance companies would be taxable under the head “Income from Other Sources’.
- Premiums paid in a financial year towards pension/annuity plan for receiving pension from a fund are eligible for deduction under Section 80CCC# up to the limit of Rs. 1,50,000/- in a financial year.
- Any payment received in commutation of pension as a lump sum on maturity is exempt under section 10(10A) of the Income-tax Act, 1961#, subject to fulfilment of various conditions under the current income-tax law.
Taxability of Pension for Senior Citizens
Since pension payments are classified as salaries or as income from other sources, as the case may be under the Income Tax Act, 1961, they’re taxed at the income tax slab rates applicable to you.
OLD TAX REGIME
If you’re a senior citizen pensioner aged above 60 but below 80, the tax rates applicable to you are shown below.
Total Taxable Income Tax Rate under the Old Income Tax Regime (excluding cess and surcharge) Up to Rs. 3,00,000 Nil Rs. 3,00,000 to Rs. 5,00,000 5% above Rs. 3,00,000 Rs. 5,00,000 to Rs. 10,00,000 Rs. 10,000 plus 20% above Rs. 5,00,000 Above Rs. 10,00,000 Rs. 1,10,000 plus 30% above Rs. 10,00,000
If you’re a senior citizen pensioner aged above 80, the tax rates applicable to you are shown below.
Total Taxable Income Tax Rate under the Old Income Tax Regime (excluding cess and surcharge) Up to Rs. 5,00,000 Nil Rs. 5,00,000 to Rs. 10,00,000 20% above Rs. 5,00,000 Above Rs. 10,00,000 Rs. 1,00,000 plus 30% above Rs. 10,00,000
NEW TAX REGIME
If you’re a senior citizen pensioner the tax rates applicable to you are shown below:
Total Taxable Income Tax Rate under the New Income Tax Regime (excluding cess and surcharge) Up to Rs. 3,00,000 Nil Rs. 3,00,000 to Rs. 6,00,000 5% above Rs. 3,00,000 Rs. 6,00,000 to Rs. 9,00,000 Rs. 15,000 plus 10% above Rs. 6,00,000 Rs. 9,00,000 to Rs. 12,00,000 Rs. 45,000 plus 15% above Rs. 9,00,000 Rs. 12,00,000 to Rs. 15,00,000 Rs. 90,000 plus 20% above Rs. 12,00,000 Above Rs. 15,00,000 Rs. 1,50,000 plus 30% above Rs. 15,00,000
Note: These tax rates are applicable for the financial year 2023 - 2024.
Taxability of Family Pension
Family Pension paid as regular monthly income (uncommuted pension) by the employer to a family member of an employee in the event of his/ her death is taxed under the head “Income from Other Sources’ in the hands of a family member. Family Pension is taxable after allowing a deduction of 1/3rd of the uncommuted pension received or Rs.15000, whichever is less under section 57(iia).
Tax Deduction at Source by Banks as per Section 194P
Section 194P enforces the banks to deduct tax on senior citizens of more than 75 years of age who have only pension and interest income from the bank. Such senior citizens are also exempt from filing income tax returns if pension income and interest income are their only annual income source.
Pensions are designed to provide you with a stable source of income during your post-retired life. With prices of goods and services rising due to inflation, the pension provided by your employer may not be enough. In that case, you can consider investing in a pension scheme. The guaranteed income from such a plan combined with your employer’s pension should enable you to live a carefree and comfortable post-retirement life.
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ARN - ED/06/23/2489
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#Tax benefits and deductions are subject to provisions of the Income Tax Act, 1961 and Income Tax Rules made thereunder. Tax Laws are subject to change from time to time.
#The customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law
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