Taxability of Pension under different Scenarios

In general, a pension is an arrangement to provide salaried with an income when they are no longer earning a regular income from employment. As per the Indian Income tax Act, the taxability of the pension depends on the scenario under which it is received:

Situation 1- When the pension is received from UNO by the employee or his family members –
It is not chargeable to tax.

Situation 2- Family pension received by the family members of armed forces- fully exempted under section 10 (19)

Situation 3 –Family pension received by family members in other cases- It is taxable in the hands of receipts under section 56 under the head “income from other sources”. Standard Deduction is available under section 57 which is one third of such pension or Rs. 15000, whichever is lower.

Situation 4- Pension in the case of an employee (received after retirement but during his life time) 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, As per the scheme, it is mandatory for persons who come under this scheme, to contribute 10 per cent of salary every month towards their pension account. A matching contribution is required to be made by the employer to the said account. The tax treatment under the new scheme is as below:

• Contribution by the employer to the notified pension scheme is first included under the head “ Salaries” in the hands of the employee;
• Such contribution is deductible (to the extent of 10 per cent of the salary of the employee) under section 80CCD;
• Employee’s contribution to the notified pension scheme (to the extent of 10 per cent of the salary of the employee) is also deductible under section 80CCD;
• When pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of the receipt;
• No deduction will be allowed under section 80C in respect of amounts on which deduction has been claimed under section 80CCD;
• The aggregate amount of deduction under section 80C, 80CCC and 80CCD cannot exceed Rs. 100,000.

Situation 5 – Pension (received by the employee after retirement but during his life time, in any other cases –

• Uncommuted Pension is taxable as salary under section 15 in the hands of a Government employee as well as a non-Government employee;
• Any commuted pension received by an employee of the central government, state government, local authority or statutory corporation is wholly exempt from tax under section 10 (10A) (i).
• Payment in commutation of pension received by any other employee (non-Govt):

– in a case where the employee receives gratuity, the commuted value of one-third of the pension which is normally entitled to receive;
– in any other case, the commuted value of one half of such pension.

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