Pension Overview

Pension: - As per Section 17 (1) (ii) of the Income Tax Act, 1961 pension is a payment made by the employer after the retirement/ death of the employee as a reward for past service.

Who is eligible for pension/family pension: - person himself, his/her spouse, children below 25 years old, unmarried daughter.

Treatment of pension: Pension is taxable under two different heads depending upon the status of the receiver:-

a.      Pension under the head Salary.

b.      Pension under the head Income from other Sources.

Pension under the head Salary: - This pension is allowed to Assessee himself. Pension is normally paid a periodical payment on monthly basis but certain employers may also allow an employee to forgo a portion of the pension and receive a lump sum amount by surrendering such portion of pension. This is known as commutation of pension. The pension may be fully or partly commuted. i.e. in lieu of pension a lump sum payment is made to the employee. The treatment of these two kind of pension is as under:-

a. Uncommutted Pension:- Periodical pension fully taxable in the hand of employee, whether Government employee or non government employee.

b.  Commuted Pension :-  Exemption U/s 10 (10 A)

Example : Mr. Sagar retired on 01.10.2010 receiving Rs. 5000/- p.m. as pension. On 01.02.2011 he commuted 60% of his income and received Rs. 300000/- as commuted pension.

·  For Government Employee, employees of local authority and employees of statutory authorities it is fully exempt.

·  For any other employees:-

Ø  If Gratuity not received – Commuted value of ½ of the pension, which he is normally entitled to receive.

Ø If Gratuity received- Commuted value of 1/3 of the pension which he is normally entitled to receive.

He is non Government employee receiving Gratuity Rs 500000 at the time of retirement

Note :-

1.   Judges of the supreme Court or High Court will be entitled to exemption of the commuted portion not exceeding ½ of the pension.

2.   Any commuted pension received by an individual out of annuity plan of the life insurance corporation of India (LIC) from a fund setup by that corporation will be exempt.

Pension under the head Income from other Sources :- The family pension received by the legal heir after the death of the employee is taxable in the hand of the legal heir, because in this case there is no employer and employee relationship.

On such pension as per section 57 (iia) a standard deduction shall be allowed to the legal heir @ 33.33% of such pension or Rs. 15000/- whichever is less.

For the purpose of clause (iia) of section 57 standard deduction, family pension means regular pension belonging to the family of an employee in the event of his death.

Circular No. 573 dated 21.08.1990-  Lump sum payment made gratuitously or by way of compensation or otherwise to the widow or other legal heir of the employee who dies while in active service- not taxable as income under the Income Tax Act.

Circular No. 776 dated 08.06.1999:- Ex-gratia  made to the widow or other legal heir of an employee who dies while still in service will not be taxable as income Tax Act 1961, if it is paid by central government/ state government/ Local Authority/ Government Public Sector Undertaking.

Exemption under section 10 (18) Pension received by certain awardees/ any member of their family:- any income by way of pension / family pension received by individual or any member of his family shall be exempt if such individual has been in the service of central government/ state government and has been awarded Paramvir Chakra or Mahavir Chakra, or Vir Chakra or such other Gallantry awards as may be notified.

Exemption of family pension received by the family members of armed forces (including paramilitary forces) personnel killed in action in certain circumstances 10 (19).

By Nandini Mishra