Taxation of Pensions and Exemptions for Pensioners

Introduction

Pensions are fixed sums of money that individuals receive at regular intervals after retirement. They are essentially a source of income and are subject to tax as salaried income under the Income Tax Act. However, the taxability of pensions may vary depending on the type of pension that individuals choose to receive after retirement.

Types of Pensions

Pensions can be broadly classified into two types: Commuted and Uncommuted.

• Uncommuted Pension- Uncommuted pension refers to the periodical payment of pension. For instance, if an individual receives a monthly pension, it is considered an uncommuted pension. This type of pension is fully taxable as salary.

• Commuted Pension- Commuted pension refers to a lump sum payment received in lieu of periodical payments. For example, after retirement, an individual might choose to receive a certain percentage of their pension as a lump sum. This is known as commuted pension.

The taxability of the commuted pension depends on the status of the employee and whether or not such an employee has received gratuity. If the commuted pension is received by a government employee, it would be completely exempt from tax. If the commuted pension is received by a non-government employee, the taxability varies.

You should declare the exempt part of the pension as `Commuted Pension` in the field labelled `Section 10(10A)- Commuted value of pension received` found in the `Nature of Exempt Allowance` section. Any excess amount should be declared as an `Annuity Pension` under the `Salary under Section 17(1)` of the Income Tax Act, 1961.

• Family Pension-Family pension is a financial provision offered by the government to provide a stable income source for the family members of deceased employees. It ensures that the dependents can continue to meet their financial needs even after the loss of the primary earner. The amount is disbursed to the spouse, children, or dependent parents of the deceased employee, depending on the eligibility criteria. 

Taxability of Family Pension

Family pension is taxed under the head ‘Income from Other Sources’. If the family pension is received as a lump sum (commuted), it is not taxable in certain cases. However, if the family pension is received periodically (uncommuted), it is taxable.

Exemption for Family Pension

There is a standard deduction available for family pension under the Income Tax Act. The exemption is the least of Rs 15,000 or 1/3rd of the uncommuted pension received. For example, if a family member receives a pension of Rs 1,20,000, the exemption available is the least of Rs 15,000 or Rs 40,000 (1/3rd of Rs 1,20,000). Thus, the taxable family pension will be Rs.1,05,000 (Rs 1,20,000 – Rs 15,000).

Exemptions for Pensioners

There are several exemptions available to pensioners under the Income Tax Act.

Higher Exemption Limit

Senior citizens and very senior citizens are granted a higher exemption limit compared to normal taxpayers. The exemption limit for the financial year 2023-24 available to a resident senior citizen is Rs. 3,00,000. The exemption limit for a resident very senior citizen is Rs. 5,00,000. However, the New Regime offers much better Basic Exemption Limits. An article on the New Tax Regime has already been published and can be gone through for ready reference.

Exemption from Filing Income Tax Returns

Senior citizens aged 75 years and above are exempt from filing income tax returns if their income comes solely from pensions and interest earned from the same bank account. However, to avail of this benefit, they need to submit a declaration to the bank in which their pension credits.

Section 194P of the Income Tax Act, 1961 provides conditions for exempting Senior Citizens from filing income tax returns aged 75 years and above.

Conditions for exemption are:

• Senior Citizen should be of age 75 years or above

• Senior Citizen should be ‘Resident’ in the previous year

• Senior Citizen has pension income and interest income only & interest income accrued / earned from the same specified bank in which he is receiving his pension

• The senior citizen will submit a declaration to the specified bank.

• The bank is a ‘specified bank’ as notified by the Central Government. Such banks will be responsible for the TDS deduction of senior citizens after considering the deductions under Chapter VI-A and rebate under 87A.

• Once the specified bank, as mentioned above, deducts tax for senior citizens above 75 years of age, there will be no requirement to furnish income tax returns by senior citizens.

Conclusion

While pensions are taxable under the Income Tax Act, there are several exemptions and benefits available to pensioners. These benefits are designed to ease the financial burden on individuals after retirement and provide them with a comfortable post-retirement life.