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Taxability of Commuted Pension and gratuity

CA.Rahul Jain (Partner) (108 Points)

11 March 2010

Is the amount of commuted pension and gratuity is taxable in the hands of the pensioner? If yes, then at what rate TDS is to be deducted?

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4 Replies

Saurabh (Asst Manager) (22 Points)
Replied 03 February 2011

Can anyone let me know something about commutation of gratuity.

i heard soething about it not exactly able to get any writeup on same

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CA PARAS BAFNA (Practising CA ) (33428 Points)
Replied 03 February 2011

Dear Rahul,

In the case of Govt employees both are exempt.

Please specify whether the employee is a Govt. employee or Non-Govt employee.

In the case of Non-Govt employees TDS will be deducted only on the taxable portion of Commuted Pension and Gratuity and the same will be deducted on the basis of slab rates.

CA PARAS BAFNA (Practising CA ) (33428 Points)
Replied 03 February 2011

Dear Saurabh,

Commutation is nothing but capitalised value of Pension.

If you get commuted your full pension and encash it

50% of the amount will be treated as taxable income,

in case no gratuity is being received by you.

If Gratuity is also there, then two third of the amount will be taxable.

Example :

Suppose one person is getting 12000/ per month as pension. (This is called non -commuted pension). It is taxable as salary income for all types of employees.

If he wants to get commuted his 40% of pension against that he can take lumps sum cash of

say 400000/- . His full commuted value of pension 400000/40% ..... will be..... 10,00,000/-.

Then onwards he will get 60% of his pension i.e. 7200/- per month.

If the assessee is also in receipt of Gratuity

Exempted Pension will be 333333/ (i.e. 1/3rd of 10,00,000)

and taxable amount of commuted pension will be (400000-333333)=66667

Gratuity is not like pension. It's generlaly one time payment at the time of retirement.

Viswa nath (Sales professional) (69 Points)
Replied 31 December 2020

Sir,

Is 1/3 commutation (receiving gratuity) taxable for LIC Group Super annuation - (contribution paid entirely by employee only) . Resigned from Private firm after 10+ years of contribution to the fund.

LIC has deducted 30% tax on my commutation. (say 1 Lac Tax levied on 3 lacs commuted pension)

Can I show the entire Commutation [3 Lacs] under ITR-2 > EI Sheet > Other Exempt income.. & claim refund.

Kindly reply as due date is nearing. Thanks.