What Is the Income Tax on Pension Amount in India?

In India, pension is an essential source of income for individuals who have retired after rendering years of service in their professional careers. The pension amount is classified as “income” under the Income Tax Act, 1961, and accordingly, it is subject to taxation. Understanding how income tax applies to pension is vital as this can directly impact the financial planning of retirees. This article delves into the intricacies of taxation on pension income, providing comprehensive details and calculations whenever required.

Categorization of Pensions in India

The pension income in India is broadly divided into two types:

1. Commuted Pension
   Commuted pension refers to the lump-sum amount received at the time of retirement or during the lifetime of the pensioner as part of the pension scheme. This is usually calculated as a percentage of the monthly pension of the individual.

2. Uncommuted Pension
   Uncommuted pension, as opposed to commuted pension, represents the regular periodic payments (monthly pension) received by the pensioner throughout their retirement period.

Taxation rules differ between commuted and uncommuted pensions.

Income Tax on Pension Amount (Uncommuted Pension)

Uncommuted pension is treated as salaries income under Section 15 of the Income Tax Act, 1961. It is taxable in the hands of the retiree in the same way as salary income is taxed. The Income Tax on Pension depends on the individual’s income tax slab. As of the financial year 2023–24, the income tax slabs are:

Under Old Tax Regime

• Income up to ₹2.5 lakh: Nil tax

• Income between ₹2.5 lakh to ₹5 lakh: 5% (rebate available under Section 87A for income up to ₹5 lakh)

• Income between ₹5 lakh to ₹10 lakh: 20%

• Income above ₹10 lakh: 30%

Under New Tax Regime

• Income up to ₹3 lakh: Nil tax

• Income between ₹3 lakh and ₹6 lakh: 5%

• Income between ₹6 lakh and ₹9 lakh: 10%

• Income between ₹9 lakh and ₹12 lakh: 15%

• Income between ₹12 lakh and ₹15 lakh: 20%

• Income above ₹15 lakh: 30%

Let’s consider an example:

• A retired individual receives an uncommuted monthly pension of ₹50,000, amounting to ₹6,00,000 annually.

• Calculation of tax liability under the old regime assuming no deductions:

• Tax = ₹5,00,000 (Taxable income after the ₹2.5 lakh exemption)

• ₹2,50,000 at 20% = ₹50,000

• Total tax liability = ₹50,000

• Calculation under the new regime assuming no deductions:

• ₹3,00,000 exempt

• Next ₹3,00,000 taxed at 5% = ₹15,000

• Total tax liability = ₹15,000

The choice between tax regimes affects taxation; hence, individuals should calculate their liability under both regimes for optimal planning.

Income Tax on Commuted Pension

Commuted pension, which is received in the form of a lump-sum payment, offers a significant tax advantage. It is exempt from income tax entirely for government employees (including central and state government employees and employees of statutory corporations). For non-government employees, part of the commuted pension is exempt under Section 10(10A) of the Income Tax Act:

• One-third exemption: For employees who receive gratuity.

• One-half exemption: For employees who do not receive gratuity.

Let’s consider an example of a non-government employee:

• Lump-sum commuted pension received: ₹15,00,000

• If gratuity is paid, exempt portion: ₹5,00,000 (1/3rd of ₹15,00,000)

• Taxable portion: ₹10,00,000

Pension Taxation Under NPS Scheme

The National Pension System (NPS Scheme) is a popular retirement savings plan regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The taxation rules for NPS withdrawals and annuities differ:

1. Lump-Sum Withdrawal
   Upon retirement, subscribers can withdraw up to 60% of the corpus as a lump-sum amount. Out of this, 40% is tax-free under Section 10(12A), whereas the remaining 20% is taxable.

Example:

• Corpus: ₹1,00,00,000

• Tax-free portion (40%): ₹40,00,000

• Taxable portion (20%): ₹20,00,000

1. Annuity Payment
   The remaining 40% corpus must be used to purchase an annuity plan to provide a regular pension. These annuity payments are taxable as income in the hands of the retiree under the prevailing tax slabs.

Additional Provisions Affecting Taxable Pension Income

Retirees often qualify for exemptions or deductions that effectively reduce their tax liability. Commonly used provisions include:

• Section 80C: Deductions of up to ₹1,50,000 on contributions made to specific savings schemes such as Employees’ Provident Fund (EPF), Public Provident Fund (PPF), and NPS Tier-I accounts.

• Section 80CCD(1B): An additional deduction of ₹50,000 specifically for contributions under the NPS Scheme.

• Section 80TTB: Income from interest earned on savings accounts is eligible for a deduction of up to ₹50,000 for senior citizens.

Tax-saving strategies should comply with the legal framework and be verified for accuracy with financial professionals.

Tax Implications for Family Pension

Family pension is paid to the family members of a deceased pensioner. It is taxed as “income from other sources.” However, there is a deduction available under Section 57(iv):

• Deduction of ₹15,000 or one-third of the family pension amount, whichever is lower.

For example, if the family pension received is ₹90,000 annually:

• Deduction = ₹15,000

• Taxable family pension = ₹90,000 – ₹15,000 = ₹75,000

Points to Consider Regarding Taxability of Pensions

1. Pension income is fully taxable unless explicitly exempt under the Income Tax Act (e.g., commuted pension for government employees).

2. Tax liability depends upon the individual’s total income and the applicable income tax slab rates (old or new tax regime).

3. Additional exemptions and deductions under sections such as 80C and 80CCD could significantly reduce the taxable income.

Disclaimer

This article is solely for informational purposes and does not constitute tax advice. Investors must thoroughly evaluate all aspects of financial opportunities, risks, and obligations when managing pension income or engaging in the Indian financial markets. Professional consultation is highly recommended for making well-informed financial decisions.

Summary:

In India, pension income is treated as taxable income under the Income Tax Act, 1961. Uncommuted pension—received as monthly payments—is taxed as salary income, and the liability depends upon the individual’s income tax slab under either the old or new tax regime. Commuted pension, given as a lump-sum payment, is exempt from tax for government employees. Non-government employees can claim partial exemptions under Section 10(10A).

Under the NPS Scheme, up to 40% of corpus withdrawn is tax-free, while annuity payments are taxed as regular pension income. Provisions such as Section 80C and Section 80TTB enable retirees to reduce tax liability through eligible deductions. Family pension is also taxed but enjoys a minor deduction under Section 57(iv).

Understanding taxation nuances on pension helps retirees plan their finances appropriately. However, it is crucial to note the widespread implications of income tax policies, which necessitate expert consultation for accurate financial planning.