After retirement, the income patterns of a person are bound to change. Shifts or halts in the steady flow of funds can be inconvenient, especially at a time when the person has just left the workforce. Since the age at which a person retires is also one where they are susceptible to illnesses and recurrent hospital visits, having financial support in the form of income-replacement payouts or pension plans always helps.
While pension plans are targeted toward people close to retirement so that they can mitigate any chances of financial distress in their retired lifetime; it is also a great tax-saving investment plan. To incentivise retirement-oriented investment solutions, many banks and corporate organisations offer pensions to their employees once they retire. While these are effectively in place to replace the income that was earned prior to retirement, they have different taxation rules. Keep reading to understand is pension is taxable, through the fundamentals of pension and pension policies.
Key Takeaways
- The tax liabilities of a person are mandated by the various Tax slabs under the Government of India. These taxes are paid corresponding to the gross income earned by the taxpayer, where the higher the gross income; the higher their tax liabilities.
- Understanding is pension taxable needs to be preceded by the fundamentals of the pension policies under the Government of India for the retired.
- Is pension taxable, and the answers for the same can be found within the Pensions Act Section 11. The requisites and criteria for the same fall under the Income Tax Act, 1961. One can only know one and the other after they are well-versed with the various tax slabs that are listed by the Government of India.
Is Pension Taxable?
Before we answer is pension taxable, we need to take a brief look into the fundamentals of pension policies in India. A pension is defined as a periodic allowance or stipend that is paid to a retired employee by their former organisation for their years of devoted service. The pension is meant to act as an income replacement which can help the retiring employee maintain their financial obligations to a certain extent.
Pensions which are thus paid to the retired employee are decided on the basis of their tenure of employment, designation at the time of retirement and any organisational accolades they may have earned at the time of their employment. This pension is then paid over the fixed agreement between the pensioner and their former company, and the pension tenure terminates once the retired employee passes away.
Now to answer the question is pension taxable, one needs to refer to the Income Tax slabs as denoted by the Government of India. As per the mandates, pensions qualify as a head salary making them taxable. Since pensions are essentially a recurring income which adds up by the end of the financial year, they are eligible for taxation under Section 192 of the Income Tax Act of 1961.
Is Commuted Pension Taxable?
Before answering is commuted pension taxable, we need to go through the fundamentals of the different types of pensions which are designed to make your life easier post-retirement. As the prime goal of a pension plan is accessibility, stability and convenience, many pensioners are given the option to choose between a commuted pension and an uncommuted pension as per their requirements.
The fundamental thing to understand before asking is commuted pension taxable, is to know if the pensioner would benefit from a staggered payout system or a lump sum payout of their accumulated pension funds.
An uncommuted pension is when the pension is paid out as a salary replacement by the employer, in the form of monthly payments.
A commuted pension is a type of pension where the pensioner has the option to avail of a designated percentage of their annuity fund in advance. The amount that is taken out as an advance payment is called a commuted pension. The funds for this annuity fund are maintained by the employee and employer, which is why the employee can access this commuted pension when needed.
In this case, one can assume that a person going for a commuted pension plan can decide to receive 10% of their monthly pension payments as a lump sum advance for the next 10 years. This means, that if the monthly pension for a person was 10,000 they can receive a commuted pension of Rs 1,20,000 from their annuity fund.
Therefore, if the pensioner was 65 years old at the time of receiving their advance payment their monthly payments will be restored to Rs 10,000 from Rs 9,000 after ten years at the age of 75.
For a better understanding about is pension taxable and is commuted pension taxable, one must have the fundamentals in place for a cohesive pension system for their retirement.
Is Pension Income Taxable?
To simply answer the questions is pension taxable and is pension income taxable, one needs to take a close look at the Income Tax Act. The nature of a pension is similar to that of gross income that is earned by a salaried/self-employed professional. The gross income earned by the pensioner is liable for taxation, as it is calculated against the income tax slabs. To understand is pension taxable, and pension is taxable under which head one can look at the following income groups:
- On Pension Received by those Below 60 years of Age, and HUFs [H3]
Pension Income (Annual) | Percentage of Pension Income Taxable |
0- 2 lacs | Nil |
2.5 lakhs to 5 lacs | 10% |
5 lakhs to 10 lacs | 20% |
Above 10 lacs | 30% |
- On Pension Received by those Above 60 years of Age [H3]
Pension Income (Annual) | Percentage of Pension Income Taxable |
Up to 3 lacs | Nil |
3 lakhs to 5 lacs | 10% |
5 lakhs to 10 lacs | 20% |
Above 10 lacs | 30% |
- On Pension Received by those Above 80 years of Age [H3]
Pension Income (Annual) | Percentage of Pension Income Taxable |
Up to 5 lacs | Nil |
More than 5 lacs but less than 10 lacs | 20% |
Above 10 lacs | 30% |
Did You Know
If the pension is directly handed to the family of the pensioner and not the pensioner themselves; it is not entirely taxable. One-third of the uncommuted pension can be exempted under Section 58 (iiA) and in the case of commuted pension it is eligible to be fully exempted.
Pension Taxability: is commuted pension taxable?
An important detail to remember is that pensioners often navigate their tax liabilities with pensions through the different modes it is available in. As one can observe, some of the biggest reservations are how taxes are levied on the basis of the gross income of the pensioner at the end of the financial year.
To bypass this high-income tax slab and higher tax liabilities, pensioners often go for a commuted pension as it offers more room to be tax efficient. One might be concerned is family pension taxable, and the answer for the same is if it operates like a salary that adds to the gross income; it is taxable.
In some cases, commuted pensions which are received as percentages from the annuity fund are exempted from taxation which adds an exception to the question is commuted pension taxable.
To further answer is pension is taxable, the commuted pension that a government employee receives is fully exempt from taxation. Commuted pensions from non-government organisations may be partially exempt. If the employee is also eligible for gratuity, with addition to a 100% commuted pension, only a third of the sum is exempted from taxation.
Conclusion
Filing income tax returns are some of the more cumbersome parts of the financial year, but are an integral aspect of the taxpayer’s life even if they have retired from the workforce. As the heads under which they pay taxes and avail their pension payments remain largely the same under Income Tax slabs, knowing is pension taxable is one of the first doubts to clear out before embarking on post-retirement bliss.
Word to Remember
SAHAJ/ ITR1: While filing Income Tax Returns, pensioners are supposed to use the form IRT1 or SAHAJ. Only to be used only by the pensioner, or their family members; this form won’t be valid for any income besides Salary or Pension.
FAQs
Pension is taxable, as it qualifies as a head salary under the Income Tax slabs presented by the Government of India. Since it is an income, which adds up to a gross income at the end of the financial year, it is taxed under Section 192 of the Income Tax Act, 1961.
If your pension income exceeds Rs 2.5 lacs annually, then you are liable to file an income tax return. However if you are a pensioner above the age of 60, you will be liable to file of the annual income crosses Rs 3 lacs; for super senior citizens taxation liabilities begin post the Rs 5 lacs threshold.
A commuted pension is one where an employee may request a certain percentage of their annuity fund as an advance payment. This lump sum amount is called a commuted pension. Commuted Pensions that are availed as percentages are exempted from tax liabilities in some situations.
Yes. Since the pension earned by a retired employee qualifies under the Salary head, a pensioner can claim standard deduction on their pension amount.
The standard deduction allowed on salaried/pensioned individuals is Rs 50,000 as per the Old Tax Regime and can be availed by the employer while calculating TDS or by the pensioner at the time of filing an income tax return at the end of the financial year.
The form to be used by a pensioner at the time of filing their Income Tax Returns is IRT1 or SAHAJ. This form is to be used only by the pensioner, or their family members; and it won’t be valid for any income besides Salary or Pension.