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Income Tax on Pensions: Are They Taxable?

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Income Tax on Pensions: Are They Taxable?
October 15, 2024

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Pensions are fixed sums of money that you receive at regular intervals after your retirement. Since they’re essentially a source of income, they’re subject to tax as salaried income as per the Income Tax Act, 1961. However, the taxability of pensions may vary depending on the type of pension that you’ve chosen to receive after retirement.

If you’re about to reach your retirement age, or if you are already receiving pension income, you need to be aware of how it is treated under the Income Tax Act. Here’s a comprehensive guide explaining income tax on pensions.

What are Commuted and Uncommuted Pensions?

When you retire, you’re usually given the option to choose between uncommuted and commuted pension.

If you choose to receive a commuted pension, a percentage of the pension fund contributed by you and your employer is paid out in advance as a lump sum amount. The remaining amount in the pension fund is then paid out to you in fixed instalments at regular intervals throughout your life. Since a large portion of the pension fund is already paid out to you in advance, the amount of pension you receive in each instalment will be lower in this case.

For example, if your pension fund amounts to Rs. 1 crore and you choose to commute 40% of this sum, you will receive Rs. 40 lakhs upfront. The remaining Rs. 60 lakhs will be used to make regular pension payouts.

On the other hand, when you choose to receive an uncommuted pension, the entire pension fund is used to provide you with a fixed sum of money at regular intervals for life. You don’t receive any lump sum amount in this case.

How Are Commuted and Uncommuted Pensions Taxed?

Now that you’ve seen the two different types of pensions, let’s take a look at how they’re each taxed.

  • Taxability of Uncommuted Pension

    The uncommuted pension payments you receive from your previous employer are classified as ‘Income from Salaries’ under the Income Tax Act, 1961, and are taxed at the slab rate applicable to you.

  • Taxability of Commuted Pension

    If you’re a government employee, the commuted part of the pension (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.

    • 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’.

    • 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.

Taxability of Pension from Life Insurance Companies

  1. Regular Pension from Pension or Annuity plans of Life Insurance companies would be taxable under the head “Income from Other Sources’.
  2. 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 limit of Rs. 1,50,000/- in a financial year.
  3. Any payment 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.

Taxability of Pension for Senior Citizens

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.

  1. OLD TAX REGIME

    If you’re 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 (excluding cess and surcharge)
    Up to Rs. 3,00,000 Nil
    Rs. 3,00,000 to Rs. 5,00,000 5% above Rs. 3,00,000
    Rs. 5,00,000 to Rs. 10,00,000 Rs. 10,000 plus 20% above Rs. 5,00,000
    Above Rs. 10,00,000 Rs. 1,10,000 plus 30% 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
    Rs. 5,00,000 to Rs. 10,00,000 20% above Rs. 5,00,000
    Above Rs. 10,00,000 Rs. 1,00,000 plus 30% above Rs. 10,00,000

  2. NEW TAX REGIME

    If you’re a senior citizen pensioner the tax rates applicable to you are shown below:

    Total Taxable Income Tax Rate under the New Income Tax Regime (excluding cess and surcharge)
    Up to Rs. 3,00,000 Nil
    Rs. 3,00,000 to Rs. 6,00,000 5% above Rs. 3,00,000
    Rs. 6,00,000 to Rs. 9,00,000 Rs. 15,000 plus 10% above Rs. 6,00,000
    Rs. 9,00,000 to Rs. 12,00,000 Rs. 45,000 plus 15% above Rs. 9,00,000
    Rs. 12,00,000 to Rs. 15,00,000 Rs. 90,000 plus 20% above Rs. 12,00,000
    Above Rs. 15,00,000 Rs. 1,50,000 plus 30% above Rs. 15,00,000

    Note: These tax rates are applicable for the financial year 2023 - 2024.

Taxability of Family Pension

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 is taxed under the head “Income from Other Sources’ in the hands of a family member. Family Pension is taxable after allowing a deduction of 1/3rd of the uncommuted pension received or Rs.15000, whichever is less under section 57(iia).

Tax Deduction at Source by Banks as per 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.

Conclusion

Pensions are designed to provide you with a stable source of income during your post-retired life. With prices of goods and services rising due to inflation, the pension provided by your employer may not be enough. In that case, you can consider investing in a pension scheme. The guaranteed income from such a plan combined with your employer’s pension should enable you to live a carefree and comfortable post-retirement life.

FAQs on Income Tax on Pensions

Q: What is the income tax slab for pensioners?

Pensioners' income tax slab in India is determined by their age and the tax system they select. Senior citizens (those in their 60s to 80s)are excused from taxes up to a basic limit of Rs. 3 lakh, while super senior citizens (those in their 80s and beyond) were exempt up to Rs. 5 lakh.

The tax rate rises gradually as income does. The base exemption level under the new tax regime is Rs.3 lakh for all age categories, with varying tax slabs being applied. Remember that there may be extra deductions and levies, so for accurate estimates, it's best to speak with a tax specialist.

Q: Will I receive a Form 16 on pension income taxable as salary?

Pension income taxation depends on whether you receive a lump sum amount (commuted pension) or installments spread throughout time (non-commuted).

Uncommuted Pension i.e regular monthly pension/annuity is always taxable for all types of taxpayers and is subject to taxation based on the applicable income tax slabs. The amount received periodically is added to your total income for the year, and taxes are levied accordingly. Form 16 shall be received from the Employer on deduction of TDS on the regular pension amounts paid.

Income tax Implications on Commuted pension or lump sum pension is as below -

For Government Employees: Fully Exempt

For Non Government Employees:

1. Employee receives both Gratuity & Pension: Assuming 100% pension is commuted, 1/3rd of the pension amount is exempted & remaining is taxed as salary.

2. Employee does not receive Gratuity i.e. only pension is received :Assuming 100% pension is commuted, ½ of the pension amount is exempted & remaining is taxed as salary

3. Commuted pension received from a life insurance company will be exempt from tax, subject to fulfillment of conditions specified.

Q: Is TDS deducted from the pension?

Yes, pension income is often subject to TDS (Tax Deducted at Source) deductions. There are certain exceptions, though. Under Section 192 of the Income Tax Act, a retired employee's regular pension is liable to TDS. The person who pays the pension, either the bank or the employer, is in charge of deducting TDS.

Family pensions are not subject to TDS when they are given to a dead pensioner's dependent children or spouse. Furthermore, under some circumstances, some amounts of commuted or lump sum pensions may also be free from TDS.

TDS is not deducted from regular pension received by an Indian Resident, under a pension plan of a life insurance company

Q: How to calculate income tax for pensioners in India?

In India, there are several considerations to consider while calculating senior citizens’ income tax. The amount of pension income is taxed ina standard deduction of Rs.50,000 shall be available. Furthermore, Section 80 TTB exempts interest income on deposits up to Rs. 50,000. Higher exemption limits and deductions, such as those for Section 80D health insurance premiums, are also advantageous to senior persons.

You arrive at taxable income by deducting allowable expenses from your total income. This income is then subject to tax at the senior citizen's appropriate slab rates. For exact computations based on unique circumstances, it is advised to visit the website of the Income Tax Department or a tax expert.

Q: Is it mandatory to file ITR for pensioners?

No, filing an ITR is not mandatoryof all pensioners. If a 75-year-old pensioner submits a statement to their bank, they may be excluded if their only source of income is interest and pension from that one bank, which is below the threshold limit.. After that, this bank will deduct TDS. Pensioners under 75 years old or those whose income exceeds the basic exemption level, however, are required to file an ITR. A return must also be filed by anybody requesting tax refunds or deductions.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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NOTE: Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions. Tax Laws are subject to change from time to time.

Customer is requested to seek tax advice from his Chartered Accountant or personal tax advisor with respect to his personal tax liabilities under the Income-tax law.

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