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Who is eligible for Pension, their Exemption and Tax liability?

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Introduction-

Pension is an amount which an employee gets after retirement for the past services, whether it is paid by government, a private company or any financial institutions providing pension schemes. Pension can be received in lump sum amount or on monthly basis. At the time of retirement you may choose to receive pension in advance. Pension received in advance is called commuted pension.

 

Who is Eligible for Pension?

Person himself, his/her spouse, children below 25 years of age and/or an unmarried daughter can also receive the pension amount.


Types of pension: There are two types of pension schemes-

1. Commuted Pension: An employee who is eligible for pension decides at the time of retirement to receive a lump sum amount.

2. Uncommuted Pension: An employee who is eligible for pension decides that he will receive the pension amount on monthly basis.

 

For Example-

Mr. X retired, he was eligible for monthly pension of Rs. 10,000 throughout his life. At that time he was interested to commute his 25% pension amount for next 10 years and balance 75% received on monthly basis.

Answer

Commuted Pension-

Mr. X will receive RS. 10,000 X12 months X 25% X 10 Years =3,00,000 as commuted pension.

Uncommuted Pension-

Mr. X will receive Rs. 10,000 X 75% = 7,500 per month for next 10 years. Thereafter he will receive full pension i.e. 10,000 per month.

 

Taxability of Pension Amount-

1. Commuted Pension:

  • For Govt. Employees-
-Commuted pension received by Govt. employee or employee of local authorities or statutory corporations is fully exempt.
  • For Non Govt. Employees-
-If they receive Gratuity along with Commuted Pension, get a tax exemption of up to 1/3rd of the total amount of pension.
-If they do not receive Gratuity, the taxable exemption amount from is 1/2 of the total commuted pension received.

Points to be remember-

  • The judges of Supreme Court and high court are given 50% of exemption of commuted pension.
  • Any commuted pension that is received from the LIC India will be exempt.

2. Uncommuted Pension:

It is fully taxable in the hands of all employees, whether government or non- government under the head “Income from Salary"

Note- From financial year 2018-19, there is a standard deduction of Rs. 40,000/- that can also be claimed under pension as it is a part of income under heads of salaries.

 

Pension that is received from UNO

  • Any income received from UNO as pension is non-taxable, as it is the income received from armed forces.
  • If a family member is entitled to receive pension from UNO, then that income is also exempt from tax.

Family pension:  :

Pension received by a family member of any employee in case of death of an employee is taxable under the head “Income from other sources”

 

Taxability of Family Pension-

  • Commuted pension-Commuted Pension received by family members is exempt from tax.
  • Uncommuted pension- 1/3rd of the uncommuted pension or Rs.15000/- whichever is less is to be exempted from tax.
For Example-
If a widow receives a monthly pension of Rs.15,000. What is her tax liability?
Answer- She can claim exemption of family pension subject to the rules- 1/3rd of uncommuted pension Rs. 15,000 monthly says 1,80,000 per year i.e. 1/3rd of Rs. 1,80,000 = 60,000

OR

Rs.15,000

whichever is less

So, she can claim exemption of Rs. 15,000 balance amount of Rs. 1,80,000-15,000= 1,65,000 is taxable.



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