Tax on Pension Income - TDS, Commuted And Uncommuted Pensions

A pension is a monthly income that the retired individuals receive. Typically, the pension is paid in two ways – lump sum and monthly payment, and it depends on the recipient’s choice. In some cases, the former employees of the company receive a lump sum amount. This is known as a commuted pension. But most people prefer receiving a pension every month. This is called the uncommuted pension.If you are wondering, is pensionincome taxable ? You must know that according to the Indian income tax rules defined under the Indian Income Tax Act , the uncommuted pension is considered an income. Therefore, it is fully taxable. The commuted pension is also taxable, but there are a few exceptions to it.

Uncommuted pension If you opt to receive a monthly pension then no matter if you are a former government employee or employed with a private organisation, the uncommuted pension is fully taxable. Commuted pension If you opt to receive the pension in lump sum, it is eligible for tax benefits under the following conditions:

• You are a government employee or employee of a local authority or statutory corporation.
• If you are a non-government employee, the computed pension is partially tax-exempt. If you also receive gratuity along with the pension, then 1/3 of the 100% of the commuted pensionis tax exempt. The remaining amount is taxable under the ‘salary’ head. And if you receive only the pension without any gratuity, 1/2 of the pension that would have been received if 100% of the pension was commuted is exempt.

So, it is evident that if you receive a pension every month, as per Income Tax provisions, it is considered an income and it is taxed the same as individuals who receive a regular salary. According to the announcement in the Budget 2019, taxpayers with an annual income of Rs. 5 lakhs or less are entitled to get a full tax rebate.Individuals whose annual income is more than Rs. 5 lakhs are entitled to pay the same taxes as the previous year. However, if your yearly income through a pension is more than Rs. 6.5 lakhs, you can claim tax deductions provided you have invested in specific investment tools like the PPF (Public Provident Fund) and prescribed equities.As a pensioner, you must file your tax returns for the amount you receive as pension under the ‘salary income’ head. If you have made investments that earn interest, you must declare the interest amount as income under the ‘income from other sources’ head.

Many people who are not sure if pension income is taxable wonder if TDS will be applied to their pension. If you receive pension through nationalised banks, a certain percentage of the income will be deducted as TDS . However, if the income earned through pensions or interest from investments is less than Rs. 40,000, the amount will be exempt from TDS.

In the event of your demise, if your family member receives the pension, it is a taxable income and the family member but declare the same in their tax return under ‘income from other sources.’ But, if the pension is received in a lump sum, it is tax-exempt. In case of uncommuted pension, Rs. 15,000 or 1/3 of the uncommuted pension amount, whichever is lesser is exempted from tax.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.