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Query on taxability of commuted pension

29 June 2024

My father-in-law commuted his pension of Employee Pension Scheme (EPS) and received a lumpsum amount in his bank account. Will this amount be taxable or tax exempt? He is working in a private organisation and does not receive any PF/gratuity.

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7 Replies

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (177840 Points)
Replied 29 June 2024

Any commuted pension received by Non Governmental Employee is exempt from tax in the following manner:

If the employee is in receipt of gratuity Exemption = 1/3rd of the amount of pension which he would have received had he commuted the whole of the pension.

If the employee does not receive an gratuity Exemption = ½ of the amount of pension which he would have received had he commuted the whole of the pension

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Gaurav Mittal (36 Points)
Replied 29 June 2024

Thank you for the reply. I request your attention for this article : www.basunivesh.com/epf-commutation-of-pension/ and specifically on the below mentioned extract.

As per this extract, the commuted pension is tax free. Is that right? It doesn't mention anything about government / non-government employee?

EPF Commutation of Pension – You can commute 1/3 of Pension

Now, what is the meaning of EPF Commutation? Let us go deep into it and understand the real meaning of commutation. Let me briefly explain this.

Assume that you worked for more than 10 years or you attained the age of 58 years. Then as per the rule, you are eligible for EPF Pension.

After the calculation, assume the pension is fixed as Rs.10,000 per month. Now as of now, you are not allowed for commutation. Hence, without any other options, you have to end up with a monthly pension of Rs.12,000.

However, due to the new changes. you are now eligible for withdrawal. How much is withdrawal?

Let us consider your monthly pension is Rs.12,000 (fixed after calculation), then the commutation is allowed on 1/3 such pension of 15 years.

Hence, 1/3 of your monthly pension is Rs.4,000 (Rs.12,000/3).

Now convert the same into years=Rs.4,000*12=Rs.48,000

Now 15 years of this is Rs.48,000*15=Rs.7,20,000 is allowed for commutation. Such commutation is tax-free for you.

Once you opt for commutation, then your monthly pension will be reduced to Rs.8,000 a month rather than the initial Rs.12,000 a month.

But what will be the pension if you survive after 15 years? Once this 15 years end, then the monthly pension will be restored to Rs.12,000 per month.

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (177840 Points)
Replied 29 June 2024

It is nothing but 1/3 of tax-free commutation, remaining Rs. 8000/- per month is still uncommuted. If you withdraw that too, it will be taxable !!!

Gaurav Mittal (36 Points)
Replied 29 June 2024

Thanks. In my case, that 1/3 rd commuted pension is taxable or tax free? Slightly confused.

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (177840 Points)
Replied 29 June 2024

1/3 rd is tax exempt.

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Gaurav Mittal (36 Points)
Replied 29 June 2024

Sir,

Just to be clear on what you're telling is, that 50% of the pension would have been exempt, if my father in law had commuted 100% of his pension (he didn't get any gratuity). However, since he can commute only 1/3 rd of the pension, it shall be tax exempt? Pls also confirm the section that is applied here.