Income Tax on Pension

A pension is a periodic compensation provided to a person for the services rendered in accordance with the agreement of service. The compensation is taxed as a part of the Income Tax assessment of the employee under the head “Salaries”. In this article, we discuss the applicability of income tax on pension in India.

Eligibility for Pension

An employee could avail the benefit of pension after completing the tenure of service. In some cases, the pension amount could also be provided to the spouse, children below the age of 25 and any daughter who is not married.

National Pension Scheme

National Pension Scheme is an initiative of the Government, which enables eligible pensioners to make periodical contributions so as to receive benefits during retirement. The scheme was introduced to ensure that these pensioners receive a fair amount of return on their investments.

Types of Pension

Pensions are classified into two types, which are briefly explained below:

Uncommuted Pension

An uncommuted pension is a periodical pension received by the pensioner. These pensions are entirely taxable for Government and Non-Government employees.

Commuted Pension

One among the many meanings for commute, as defined in the Oxford English Dictionary, is “Replace (an annuity or other series of payments) with a single payment.” Commuted pension is a mechanism in which the employer permits the employee to receive a higher amount of pension by surrendering a portion of the pension.

Tax Rates for Individuals and HUF's (Below the age of 60)

Individuals or HUF’s who had voluntarily retired before attaining 60 years of age will incur the following income tax on pension income. If the total pension received is above the basic exemption limit, income tax return must be filed by the retired individual.

For receiving annual pension within the range of Rs.2.5 lakhs – Nil
For receiving annual pension ranging between Rs.2.5 lakhs and 5 lakhs – 10%
For receiving annual pension ranging between Rs.5 lakhs and Rs.10 lakhs – 20%
For receiving annual pension above Rs.10 lakhs – 30%

Tax Rates for Senior Citizens (Above the age of 60)

Senior citizens will be levied with the following income tax rates for pension:

For receiving annual pension within the range of Rs.3 lakhs – Nil
For receiving annual pension ranging between Rs.3 lakhs and Rs.5 lakhs – 10%
For receiving annual pension ranging between Rs.5 lakhs and Rs.10 lakhs – 20%
For receiving annual pension above Rs.10 lakhs – 30%

Tax Rates for Super-Senior Citizens (Above the age of 80)

Super-senior citizens aged 80 and above will be levied the following income tax rates on pension:

For receiving annual pension within the range of Rs.5 lakhs – Nil
For receiving annual pension above Rs.5 lakhs but not more than Rs.10 lakhs – 20%
For receiving annual pension above Rs 10 lakhs – 30%

Pension for Family Members

As already observed, pensions can be availed by the employee’s spouse, children (whose age is 25 or less), and unmarried daughter. Pensions accorded to such family members will be taxed under the head “Income from other sources.” The beneficiary will be granted a standard deduction at the rate of 33.33% of such pension or Rs 15,000; whichever is less.

TDS on Pension

Tax Deducted at Source is levied on the pension amounts distributed to the employee. Therefore, all the annuity pensions and the pension arrears remitted to the employees are taxed during payment. However, pension given to family members are not deducted at source as such compensation is taxed under the head “Income from other sources.”

Tax Deductions

The Income Tax Department has provided that the following incomes would be deducted from tax calculation:

Family members of the pensioner are considered eligible to claim a deduction for the premium paid towards insurance policies, PPF, infrastructure bonds, repayment of home loans, investments made in the mutual fund pension plans, investments made in the savings connected with equities, and tuition fees. A deduction of Rs 10,000 can be claimed for such transactions. (Provision not applicable to individuals whose annual income is above Rs 5 lakhs in a year)
Senior citizens above the age of 65 years can claim tax rebate to the extent of Rs 20,000.
Pension received in the form of arrears will be allowed a specified deduction.

Tax Exemptions

Pensioners are granted tax exemptions for the following:

Pension granted to the employees of the UNO or their family members.
Judges of the Supreme Court and High Court will be granted exemptions for half of the commuted pensions received by them.
Interest earned from Public Provident Fund (PPF).
People, who have won accolades such as the Maha Vir Chakra, Param Vir Chakra, and so on are provided specified tax exemptions.
Pension provided to widows, children, and other persons who are dependant on the assessee.

Additional Remittances

Other than the payment of income tax, the taxpayer would be obligated to remit surcharge and educational cess. The remittance of the surcharge is only levied on the taxpayers if their income during a financial year exceeds a sum of rupees one crore.