Taxability of Pension

Pension is one of the popular retirement benefits provided by the employer for past services. Taxability of pension depends on different scenarios, which have been explained below:

Received from UNO

Pension received from UNO by the employee or his family members is not chargeable to tax.

Family Pension

Family Pension received by the family members (other than the family members of armed forces) is taxable in the hands of recipients. It is taxable under the head “Income from other sources”, but standard deduction is available which is one-third of such pension or Rs. 15,000, whichever is lower.

Pension received after retirement but during the life time

By employee who has joined the Central Government or any other employer on or after January 1, 2004: New pension scheme is applicable to new entrants to Government service or any other employer and taxability is as follows-

  • Contribution by the employer and the employee – Deductible u/s 80CCD to the certain extent.
  • When Pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of the recipient.

By any other employee

  • Uncommuted pension – Taxable as salary in the hands of a Government employee as well as a non-government employee.
  • Commuted pension

Fully exempt from tax – Received by an employee of the Central Government, State Government, Local Authority or statutory corporation, Judges of the Supreme Court and High courts.

Exempt upto certain extent – Commutation in pension received by any other employee exempt upto certain extent:

  • If employee receives gratuity, the commuted value of one-third of the pension which he is normally entitled to receive is exempt from tax.
  • In any other case, the commuted value of one-half of such pension is exempt from tax.
  • Government employees absorbed in a public sector undertaking are entitled to exemption in respect of lump sum received on commutation of pension.

If payment in commutation of pension received by the employee exceeds the aforesaid limits, such excess is liable to tax in the assessment year relevant to the previous year in which it is due or paid.  However, the assessee can claim relief in section 89. provides full fledged comprehensive tax planning service wherein we suggest the best investment and tax saving plans, which would minimize your total tax on income.

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