Is Pension Taxable? All that Taxpayers Must Know

Income tax is a levy levied by the government on the incomes of individuals and organisations. The kind and source of income, the taxpayer's age and residency status, and other factors all affect the income tax rates and regulations. Pensioners are people who, after retirement, continue to receive regular benefits from an employer or fund; however, their pension income is subject to income tax. However, the Income Tax Act of 1961 provides seniors with additional perks and deductions that help lower their overall tax burden. In this guide, we will explain the concept of tax on pension in detail.

---

Table of Contents

Understanding Commuted and Uncommuted Pension

Tax Treatment of Commuted and Uncommuted Pension

Is Pension Taxable? Answering the Question

TDS on Pension

Tax on Pension Received by a Family Member

Steps to Report Pension Income in ITR

Deductions on Pension Income

Conclusion

Most Asked Questions

---

Understanding Commuted and Uncommuted Pension

When a pension is "commuted," it means that the pension amount is changed, usually either a lump sum or a series of equal installments. A commuted pension allows you to get a portion up front, with the remainder amount being paid out in smaller, more frequent installments. A government employee's pension, whether commutated or lump sum, is exempt from taxes. A pension plan or benefit that has not been converted into a lump sum or series of installments is known as an uncommuted pension. This implies that you might get your pension in installments, typically once a month. Any periodic pension payout, whether commuted or not, is fully taxable as salary. 

Illustration: For instance, you decide to get Rs 10,000, or 10% of your monthly pension, ahead of time for the next ten years at the age of sixty. You will receive this as one big payment. Your commuted pension is therefore 10% of Rs 10,000x12x10 = Rs 1,20,000. For the following ten years, until you turn seventy, you will receive your uncommuted pension of Rs 9,000. Once you turn seventy, you will receive your full pension of Rs 10,000.

Tax Treatment of Commuted and Uncommuted Pension

• Any periodic pension payout, whether commuted or not, is fully taxable as salary. The Rs 9,000 you received in the aforementioned scenario is fully taxed. Starting at age 70, an additional 10,000 rupees are totally taxable. 

• A government employee's pension, whether commutated or lump sum, is tax-free.

• A non-government employee's pension, whether commutated or lump sum, may be partially exempt if they also get a gratuity.

• If an individual receives both a pension and a gratuity, 1/3 of the pension amount is exempt and the remaining portion is subject to salary tax if 100% of the pension was commuted.

• If an individual simply receives their pension and does not receive a gratuity, then they are excused from paying ½ of the pension amount if all of it was commuted.

Notably, both tax regimes offer an exception with regard to commuted pensions.

Is Pension Taxable? Answering the Question

The pension income is subject to taxation in accordance with the income tax slabs established by the Indian government, just like other income earned in the country. Section 192 of the Income Tax Act imposes taxes on any income falling within the category of salary, including pensions. The tables below show how income tax is applied to pension amounts.

Income Tax Rates for Individuals Under 60 and HUFs (for retirements made voluntarily or retirements made earlier than 60 in any other situation)

Pension Income Tax Rates for Senior Citizens (Aged over 60)

Pension Income Tax Rates for Super-Senior Citizens (Aged over 80)

TDS on Pension

According to Section 192-1, TDS (Tax Deducted At Source) must be applied to all amounts of money paid by the employer and included under the income head "Salary" (including pension). As a result, at the time of payment, all annuity pensions and pension arrears given to retired employees are subject to taxes. Since it comes under the category of "income from other sources," the income given to the seniors' families is not subject to TDS taxes. Employers (whether they are private, state, federal, or hybrid government entities) and nationalised banks (which are tasked with annuity pension payments) bear the burden of TDS taxes. The insurance provider is in charge of the TDS deduction for retirement schemes.

Tax on Pension Received by a Family Member

A family member's pension is taxed under the heading "income from other sources" on their income tax return. In certain situations, this pension is not taxed if it is converted or paid as a lump sum. To some extent, a family member's uncommuted pension is exempt. Tax exemption is granted for Rs. 15,000 or one-third of the uncommuted pension received, whichever is lower. 

For instance, the exemption allowed is at least Rs 15,000 or Rs 33,333 (1/3rd of Rs 1,00,000) if a family member receives a pension of Rs 1,00,000. The family pension that is subject to taxation will be Rs. 85,000 (Rs. 1,00,000 – Rs. 15,000.)

Steps to Report Pension Income in ITR

Depending on the kind of pension and the work arrangement, there are differences in reporting pension income and employer information on the income tax return. The general procedures to disclose pension income and employer information are as follows:

Step 1: Obtain Form 16/Pension Statement. Your company should give you Form 16, which includes information about your salary, taxes deducted, and other pertinent details, if you are a salaried employee receiving a pension. You should receive a pension statement with all the relevant information if you receive a pension from the government or from other sources.

Step 2: Recognise the type of pension. These are: 

• Uncommuted Pension: A pension is regarded uncommuted if you get the entire amount without a lump sum withdrawal.

• Commuted Pension: Your pension is considered commuted if you get a lump sum amount and the remaining comes as regular payments. 

Step 3: Record pension income in the correct section. Depending on the pension's source, you should record your pension income in the correct section of your income tax return. Pension income is often reported under the heading "Income from Salaries" for pensions from the government or "Income from Other Sources" for pensions from other sources.

Step 4: Enter employer details. You will find a space on the income tax return form where you will need to enter your employer's or your pension provider's details. This contains the employer's or pension provider's name, address, and tax identification number (TAN). 

Step 5: Declare the details of your commutated pension, if any. If you get a commuted pension, you may be required to declare the commuted amount and other pertinent information in a separate area of the income tax return form.

Step 6: Claim deductions if applicable. You may be able to claim some pension income-related deductions, like the standard deduction or deductions under Section 80TTB (for elderly people), depending on your type of pension and other conditions. Make sure you look over the appropriate deduction possibilities that apply to you.

Step 7: Validate and file your ITR. After making sure all the required information has been appropriately input, validate the data and submit your income tax return.

Deductions on Pension Income

The following deductions or exemptions can be claimed on pension income:

Section 88: This section allows individuals and pensioners' families to claim a tax refund. Tax exemptions apply to the following: payments made towards life insurance premiums, PPF, infrastructure bonds, home loan repayment, investments in mutual fund pension plans, investments in savings linked to equities, and tuition fees, up to a maximum of Rs 10,000. Individuals earning more than Rs 5 lakhs annually are not eligible for tax rebates under this specific clause.

Section 88 B: If a senior person is above 65, they are eligible for an additional tax refund under this clause. There is a Rs 20,000 maximum rebate.

Section 89-1: A person is entitled to a certain amount of tax relief under this clause when they receive their pension in the form of arrears. You must submit Form 10 E if you want to request relief under this section.

Other Deductions:

• Any pension that UNO employees or their families receive is not subject to taxes. 

• Judges of the Supreme Court and the High Court are exempt from income tax on half of their commuted pensions.

• Taxes do not apply to any interest received from the Public Provident Fund, or PPF. Upon maturity, these investment opportunities will yield tax-free returns if you choose to contribute to a pension.

• Section 10-18-I exempts recipients of the Maha Vir Chakra, Param Vir Chakra, and other gallantry medals from paying taxes.

• Section 10-19 offers tax exemptions on the pensions awarded to widows, children, or their designated heirs of Indian Armed Forces veterans upon their passing.

Conclusion

Even though pension income is subject to taxes, contributing to a pension plan might greatly benefit you in your later years. During the years that one is earning income, saving in a pension plan also entitles one to various tax advantages. The best way to understand these schemes and invest in them is by consulting a tax expert.

FAQ

Q1. How is pension income taxed? 

If a pension is not commuted, it is taxed like a salary. If it is commuted, however, it is taxable as salary and is also subject to section 10(10A)'s prescribed exemption amount. 

Q2. Is pension eligible for standard deduction allowed for salary income?

Under the new tax regime, starting in FY 2023–2024, you can deduct a standard amount from your family pension of up to Rs 15,000 or one-third of your pension, whichever is less.

Q3. Should I file an ITR on my pension income?

If your yearly pension income is above Rs 2.5 lakh, you must file a return. The cap is set at Rs 3 lakh for seniors who are 60 years of age or beyond. Additionally, the cap is set at Rs 5 lakh for extremely senior individuals who are 80 years of age or older.

Q4. Under which head is pension taxable?

Pensions are subject to income tax under the "Income from Salary" head and income tax under the "Income from Other Sources" category for families.

Q5. If an employee gets a pension abroad, is it taxable under the head salaries?

If an employee receives pension payments from overseas for work completed in India, this income is considered to have originated in India and will be counted towards the assessee's overall income regardless of the employee's residency status.

Q6. Is TDS deducted from the family pension?

TDS is not deductible for the family pension as per Section 192 of the Income Tax Act. 

Q7. What is the tax-free allowance for pensioners?

Senior individuals, including family pensioners who are eligible for deduction benefits of up to Rs 15,000, are permitted a standard deduction of ₹50,000 from their pension income. Pensions that are monthly or uncommuted are subject to the same taxation as salaries. However, only Section 10(10A) provides a limited tax exemption for commuted or lump sum pensions.

Q8. How much can a senior citizen earn without having to pay taxes?

An elderly citizen who is 60 to 80 years of age is eligible for a basic exemption of Rs 3 lakhs. Additionally, a senior citizen who is above 80 years old is eligible for a basic exemption of Rs 5 lakhs.

Q9. At what age can a person stop paying taxes?

There is no such provision for nonpayment of taxes if a person reaches a particular age.

Q10. Which form is used to file pension ITR? 

For seniors, the income tax form is ITR 1, sometimes referred to as Sahaj. The directions for filling out the form are also available here. The form must be completed before July 31st of the current fiscal year. Both pension recipients and their family members, if any, must use this form. Keep in mind that the form can only be used to file an ITR for income received from a salary or pension; it cannot be utilised for business income.

Q11. What is a family pension exemption?

Under the new tax structure, a family pension may take a standard deduction of Rs 15,000 or one-third of the pension amount, whichever is less. 

Q12. How is family pension received by widows taxed?

The legal heirs of a deceased individual who was receiving a pension receive the family pension. Under the ITR's "Income from other sources" heading, it is taxable. The family pension's tax obligation is determined by the recipient's income tax slab rate.

Q13. Is the army pension exempt from income tax?

Section 10(14) of the Income Tax Act, 1961 exempts disability pensions received by Indian Army members from income tax. This exemption, which covers the full pension amount received by disabled troops, aims to give those who have been disabled during their service some financial comfort. Pensions received by military family members are likewise exempt.