Is pension Taxable?
Millions of individuals spend their life with a fixed payout of pension after a specific period of age. But in the initial days of their profession, they seem a bit perplexed about the taxation of pensions. A question that disturbs almost every taxpayer who is very near to retirement is “Is pension taxable”. Yet, the answer to this question can not be given in just a single yes or no. let’s understand the taxation on pensions below-
What is a pension?
Before getting into the taxation system on pensions, we first need to understand what pensions are. A pension is a fixed amount paid each month to individuals after retirement from the job/service. Section 60, of the CPC, and the Pension Act’s Section 11, defined pension as a stipend periodical or commuted allowance, for the past services provided to the organization, a public or private sector organization by a person on the basis of special, or other merits.
The pension is predefined based on a prior agreement and it ends when the employee dies and in some other special cases. Pension is an alternate way of salary income so that the post-retirement can maintain their standard of living.
Is pension taxable just like salary income?
Pension payouts are normally taxable depending on the tax slab you fall in. These types of pensions are defined as un-commuted pensions. However, there is another type of pension called the “commuted pension”. In commuted pension, You are given a specific portion of the pension in advance.
For example, if you receive 10% of your monthly pension (Rs 10,000) for the next 10 years as a lumpsum amount, you will receive 10% of Rs 10,000 X 12 months X 10 years = Rs 1,20,000. You may withdraw Rs 1.2 lakhs as a lump sum amount and the balance of Rs 9,000 per month will be paid out for 10 years. You will then get Rs 10,000 per month from the 11th year. This is called commuted pension.
Taxability of Commuted and Un-commuted Pensions
All un-commuted pensions are taxable as salary when received. The taxation system for commuted pensions is slightly distinct. The un-commuted monthly payout (in the above example) of Rs 9000 is fully taxable for 10 years and Rs 10,000 (from the 11th year) is fully taxable.
- As per section Section 10(10A), your commuted pension is exempt from tax whether you work/ed for a government body or corporation/company.
- In case you do not work for a government body or corporation, you will be taxed as mentioned below-
- In case you obtain the compensation along with your pension, the tax exemption is equal to one-third of the commuted pension.
- On the other side, if you do not obtain compensation along with your pension, the tax exemption is equal to one-half of the commuted pension.
Tax on Pension Income After Retirement If you are below 60 and volunteered for early retirement, your income from pension and/or other sources will be taxed if the total income is above the exemption limit:
Old Tax Regime
Below is mentioned the tax slab for the resident individuals who are below 60 years of age and (Hindu Undivided Family) HUF
- If the pension/total income from all sources is up to Rs 2.5 lakhs: Nil taxes
- If the pension/total income from all sources is between Rs 2.5 lakhs and Rs 5 lakhs: 10% tax
- If the pension/total income from all sources is between Rs 5 lakhs and Rs 10 lakhs: 20% tax
- If the pension/total income from all sources is more than Rs 10 lakhs: 30% tax
Below is mentioned the tax slab for senior citizens who are between the age of 60 to 80 years of age) are listed below:
- If the pension/total income from all sources exceeds Rs 3 lakhs: Nil taxes
- If the pension/total income from all sources is between Rs 3 lakhs and Rs 5 lakhs: 10% tax
- Pension/total income from all sources is between Rs 5 lakhs and Rs 10 lakhs: 20% tax
- If the pension/total income from all sources exceeds Rs 10 lakhs: 30% tax
For the senior resident individuals (80 years and above) income up to Rs 5 lakhs are exempted from income taxes, and the slab starts with a 20% tax rate.
New Tax Regime
A new tax regime came with lower tax rates. It is an option available to you for taxation with lower tax rates. However, the regime does not allow the carry forward of losses and adjustment of losses under other heads of income. Also, deductions under sections 80C, 80D, 80TTB, and HRA are not authorized under the New Tax Regime. The tax rates slab as per the new tax regime (applicable for all age groups) is given below-
Income tax slabs rates
Up to Rs2,50,000
Rs 2,50,001 - Rs 5,00,000
5% above Rs2,50,000
Rs 5,00,001 - Rs 7,50,000
Rs 12,500 + 10% above Rs 5,00,000
Rs 7,50,001 - Rs 10,00,000
Rs 37,500 + 15% above Rs 7,50,000
Rs 10,00,001 - Rs 12,50,000
Rs 75,000 + 20% above Rs 10,00,000
Rs 12,50,001 - Rs 15,00,000
Rs 1,25,000 + 25% above Rs 12,50,000
Above Rs 15,00,000
Rs 1,87,500 + 30% above Rs15,00,000
Tax on Pension Acquired by a Family Member
In case of any lose, untimely demise, or death, the nominee/family member would be able to obtain your pension:
- In the case of government employees, the spouse, son, or daughter is eligible to receive the amount pension.
- In case you have assigned your child to obtain the amount of pension, after you, only children up to 25 years of age, or until they get married or until they start earning a monthly income > Rs 9,000 per month (whichever is earlier) are eligible.
- In case the son or daughter, is suffering from any disorder or disability to render him or her unable to earn a living even after attaining the age of 25 years, the pension can continue to be paid for a lifetime regardless of conditions.
- Dependent parents are also eligible in case the government servant is not survived by an eligible spouse/child. The pension will be payable to the mother first, failing the father. Such pension is taxed under the head's income from other sources in the taxpayer’s income tax return.
- Commuted pensions are not taxable Uncommuted pensions are exempted to up to Rs 15,000 or 1/3rd of the un-commuted pension received
For example – If the pension is Rs 100,000, the exemption available lower than Rs 15,000 and Rs 33,333 (1/3rd of Rs 1,00,000). Accordingly, the taxable amount of the pension will be Rs 85,000 (Rs 100,000 – Rs 15,000).
The pension received from UNO
Pensions that are received from UNO by its employees or their families are exempted from tax. Pension received by family members of the armed forces is also exempted.
If you have any questions/queries related to tax on pensions, reach out to us at email@example.com and we will assist you.
How is the pension taxed?
The pension is taxed as an income from the salary.
Why is there a tax on pensions?
All pensions are not taxed. According to the taxation rules, an un-commuted pension is considered a salary under the Income Tax Act, 1961, and is therefore taxable.
How do I calculate tax on my pension?
The 10% of the total pension of 10 years will be given in advance as a lump sum amount. Therefore, 10% of Rs. 20,000 x 12 x 10 = Rs. 2,40,000 will be the computed pension.
What is commuted pension?
A commuted pension amount is a portion of the pension plan that is paid as a lump sum amount one go at retirement is called commuted pension. This portion can be used for any immediate financial needs right post-retirement.
Is pension counted as income?
According to the taxation rules, an un-commuted pension is considered a salary under the Income Tax Act, 1961, and therefore it is taxable.