Pension Income is the fixed sum of money that a retired person receives at regular intervals after the retirement. Since it is essentially a source of income, therefor it is subject to tax as salaried income as per the Income Tax Act, 1961.altough, the taxability of pension may vary as per the type of pension that an employee has chosen to receive after retirement. Pensions are made to provide you with a stable source of income during your post-retired life.
Commuted and Uncommuted Pensions
a retired person generally provided the option to choose between uncommuted and commuted pension.
In the commuted pension system, a fixed percentage of the pension fund contributed by retiree and the employer will paid out in advance as a lump sum amount. The remaining amount in the pension fund is then paid out to retiree in fixed instalments at regular intervals throughout his life. Since a huge portion of the pension fund is already paid out to the retiree in advance, the amount of pension he receive in each instalment will be lower .
Eg. if a retired person’s pension fund amounts to Rs. 50 Lakh and he choose to commute 40% of this sum, you will receive Rs. 20 lakhs at the time of retirement and remaining Rs. 30 lakhs will be used to make regular pension payouts.
On the other system, when the retiree choose to receive an uncommuted pension, the entire pension fund is used to provide him/her with a fixed sum of money at regular intervals for life. He/She won’t receive any lump sum amount in this case.
Taxability of Commuted and Uncommuted Pensions
Both the two different types of pensions will be taxed differently:-
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Taxability of Uncommuted Pension
The uncommuted pension is classified as ‘Income from Salaries’ under the Income Tax Act, 1961, and taxed at the slab rate applicable.
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Taxability of Commuted Pension
If you’re a government employee, the commuted part of the pension i.e the lump sum amount that you receive will be exempt from tax. However, the regular pension payouts you receive thereafter will be fully taxable under the head ‘Income from Salaries’.
If you’re a non-government employee, the income tax on your pension will vary depending on whether or not you receive gratuity payments along with your pension.
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If you receive gratuity along with your pension
One–third of the commuted pension is tax-free, whereas the remaining two-thirds is fully taxable under the head ‘Income from Salaries’.
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If you only receive a pension
50% of the commuted pension will be tax-free, whereas the remaining 50% will be fully taxable as salaried income.
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Taxability of Pension from Life Insurance Companies
- Regular Pension amount from Pension or Annuity plans of Life Insurance companies would be taxable under the head “Income from Other Sources’.
- Any amount received in commutation of pension as a lump sum on maturity is exempt under section 10(10A) of the Income-tax Act, 1961, subject to fulfilment of various conditions under the current income-tax law.
- Premiums paid in a financial year towards pension/annuity plan for receiving pension from a fund are eligible for deduction under Section 80CCC up to the applicable limit of Rs. 1,50,000/-.
Taxability of Senior Citizens Pension
Since pension payments are classified as salaries or as income from other sources, as the case may be under the Income Tax Act, 1961, they’re taxed at the income tax slab rates applicable to you.
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OLD TAX REGIME
If retiree a senior citizen pensioner aged above 60 but below 80, the tax rates applicable to you are shown below.
Total Taxable Income Tax Rate under the Old Income Tax Regime Up to Rs. 3,00,000 Nil Tax Rs. 3,00,000 to Rs. 5,00,000 5% Tax above Rs. 3,00,000 Rs. 5,00,000 to Rs. 10,00,000 Rs. 10,000 plus 20% Tax above Rs. 5,00,000 Above Rs. 10,00,000 Rs. 1,10,000 plus 30% Tax above Rs. 10,00,000 If you’re a senior citizen pensioner aged above 80, the tax rates applicable to you are shown below.
Total Taxable Income Tax Rate under the Old Income Tax Regime (excluding cess and surcharge) Up to Rs. 5,00,000 Nil Tax Rs. 5,00,000 to Rs. 10,00,000 20% Tax above Rs. 5,00,000 Above Rs. 10,00,000 Rs. 1,00,000 plus 30% Tax above Rs. 10,00,000 - NEW TAX REGIMEIf retiree is a senior citizen pensioner the tax rates applicable to you are shown below:
Total Taxable Income Tax Rate under the New Income Tax Regime Up to Rs. 3,00,000 Nil Tax Rs. 3,00,000 to Rs. 6,00,000 5% Tax above Rs. 3,00,000 Rs. 6,00,000 to Rs. 9,00,000 Rs. 15,000 plus 10% Tax above Rs. 6,00,000 Rs. 9,00,000 to Rs. 12,00,000 Rs. 45,000 plus 15% Tax above Rs. 9,00,000 Rs. 12,00,000 to Rs. 15,00,000 Rs. 90,000 plus 20% Tax above Rs. 12,00,000 Above Rs. 15,00,000 Rs. 1,50,000 plus 30% Tax above Rs. 15,00,000 ****These tax rates are applicable for the FY 2023 – 2024.
Taxability of Family Pension
Family Pension is taxed under the head “Income from Other Sources.” Family Pension paid as regular monthly income (uncommuted pension) by the employer to a family member of an employee in the event of his/ her death. Family Pension is taxable after allowing a deduction of 33.33% or Rs.).
TDS Deduction by Banks U/s Section 194P
Section 194P enforces the banks to deduct tax on senior citizens of more than 75 years of age who have only pension and interest income from the bank. Such senior citizens are also exempt from filing income tax returns if pension income and interest income are their only annual income source.