For the purposes of taxation, pension payments are treated as salary income in return forms in India. The dictionary defines a pension as an amount paid at regular intervals by the State or a past employer on account of services previously rendered, age, disability, poverty or other uncontrollable loss suffered. Similar definitions obtain in Section 60 of the Civil Procedure Code and Section 11 of the Pension Act. Pension payments end only upon the death of the retiree.
Pensions in India
Those who serve the formal part of the non-government sector address their pension requirements by legally enforceable pension plans based on schemes of the Employees Provident Fund Organisation. Employers may decide to opt out of these and form Exempted Funds or Superannuation Funds for those employees who choose to decide in favour. Self-employed professionals and blue-collar workers in both organized and unorganized sectors may choose to adopt other voluntary pension schemes.
Difference between Commuted and Uncommuted Pension
Pension is often paid on a monthly basis but it can also be commuted, ie, paid as a single consolidated sum. This consolidated sum may be any percentage of your monthly payment. In such a case, your commuted sum would be calculated and your regular pension would be reduced by an equated monthly amount for as long as your commuted sum remains unrepaid.
Regularly paid pension is taxed in the same manner as regular income.
Commuted pension for a government retiree is fully exempt from income tax payment while it is only partly exempt for others.
Income Tax Exemptions and Deductions for Pensioners
- For a private sector employee, income tax rules state that where gratuity is also received by the retiree, the exempted income is one third of the amount of pension that would have been received assuming 100% of the pension was commuted. If gratuity is not a part of retirement benefits alongside pension then only one half of the pension that would have been receivable had 100% of the pension been commuted would be exempt from income tax.
- Commuted family pensions are not taxed by the authorities. But the part that is given out in monthly or periodic instalments would be exempt by Rupees 15000 or one third of the amount received depending on which one is lesser.
- UN employee families that receive family pension are not obliged to pay any income tax on that amount.
- Family pensions received by relatives of armed forces personnel are also exempt from income tax.