What is the Taxability of Pension in India?

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A pension is a financial tool that people use to live independently after retirement. There are many pension plans available in India - NPS, PPF, EPF and annuity plans. These pension plans provide regular income to the investors after they have retired or after the fund reaches maturity.

In India, the income that one gets from such pension funds is taxable. This article aims to cover the taxability of pensions and all the other related factors.

Pensions are a periodic amount that retired people usually receive on a monthly basis. However, people who receive pensions can also take it as a one-time payment instead of a monthly payment.

There are two types of pensions based on payout method:

• Commuted Pension: Individuals receive a portion of the funds in a lump sum for immediate use.
• Uncommuted Pension: Individuals will get the funds in regular monthly installments.

In India, an uncommuted or monthly pension is fully taxable for employees working in any industry. An uncommuted pension is where an individual receives monthly funds, and it will be treated as the pensioner’s salary for taxation purposes.

These monthly pensions are taxed according to an individual's applicable tax slab. Therefore, individuals can reduce their tax liabilities by claiming deductions, as this monthly pension is considered a replacement for one's monthly income.

Individuals who take commuted pension, i.e, lump sum payment after their retirement may not have to pay taxes in some cases. Below are a few scenarios where individuals will receive exemptions on their tax on retirement benefits if the individual takes a lump sum:

• If an individual worked as a government employee before retiring, then this individual will be exempted from paying taxes on his/her commuted pension under Section 10(10A) of Income Tax Act.
• Individuals who had worked as private sector employees before retiring their commuted pension will be exempted from taxes in the following cases:
  • If the individual receives a pension along with a gratuity, then 1/3rd of the pension this employee would have received if he/she had commuted the whole pension will be exempt from taxes, as per Section 10(10A) of Income Tax Act.
  • If an individual receives only a pension and no gratuity, then ½ of the pension the individual would have received had the individual commuted the whole pension will be exempt from taxes, as per Section 10(10A) of Income Tax Act.

If a person wishes to calculate the amount of tax on pension for their commuted funds, then they can use the following formula:

Amount of pension to be commuted X 12 X purchase value for age next birthday.

For instance, if the pension amount is ₹5843 and the commuted pension percentage is 40%, then the commuted amount should be ₹2337. The purchase value, as per the new commutation table, is 8.194. So, now, if you put these values into the formula, then the value of the pension will be:

2337 X 12 X 8.194= ₹2,29,792.54

If you round off the calculation, the amount will be ₹2,29,793.

However, if individuals face problems using this formula to calculate the taxability of their commuted pension, then they can use an online tax calculator. To calculate tax using this tool, follow the steps below:

Step 1: Select the uncommuted or commuted pension option after opening the taxability calculator page.

Step 2: Select your employment sector, government or non-government.

Step 3: Enter the amount of commuted pension that you have received.

Step 4: Mention the percentage of commutation pension.

Step 5: Select yes or no if you have received gratuity during retirement.

Step 6: Click on calculate taxability of pension tab.

Yes, people who receive pensions must file their Income Tax Returns if the total income they receive through retirement benefits exceeds a specific amount. However, one should consider this before claiming exemptions under Section 80C and Section 80U of the Income Tax Act.

Pensioners will have to file IT Returns if their income exceeds the following threshold:

• ₹2.5 Lakh (pensioners who are below 60 Years)
• ₹3 Lakh (pensioners who are between the age of 60-80 Years)
• ₹5 Lakh (pensioners above 80 Years)

This income is based only on the earnings an individual receives from his/her pension funds. However, if an individual has other income sources like rent, property, interests, etc., then they need to calculate their tax liability after considering the earlier restrictions.

It is very important to know the details of taxability of pension, especially for salaried individuals who will receive a pension after retirement. Moreover, both self-employed and salaried people can consider numerous retirement mutual funds available in the Indian market. You can invest your money in a suitable fund to receive pensions after retirement.

Furthermore, learning about the different types of pension and calculation of the taxable amount, will also help you understand how your income from those retirement funds will be taxed.