How to Calculate Income Tax on Pension Income

How to Calculate Income Tax on Pension Income or Tax Treatment of Pension Income, Income Tax on Family Pension or How to Compute Tax on Pension Income these are the general question at the time of retirement every person has it? 

Pension income can be the in the form of monthly income or onetime payment (Commuted pension) made by the employer at the time of retirement or death of an employee. In case of the Government employees onetime pension income is not taxable but for others it will be taxable subject to certain conditions given under the income tax act.

In case of monthly pension income it will be taxed at the “normal slab rates” of the income tax act. ( Check Income Tax Slab Rate https://www.vatfaq.in/income-tax-slab-income-tax-rates-for-fy-2013-14-ay-2014-15.html)

Pension Income Not Taxable for following persons

  1. Pension received from UNO by the employee or his family member is exempt
  2. Family pension received by the family member of deceased employee is taxable in the hand of family member in the head income from other sources but family pension received by family member of deceased armed force employee will be exmepted from Income Tax.
  3. Judge of supreme court and high court will be entitled to the exemption of the commuted pension

Pension Income Tax Treatment or Income Tax Calculation on Pension Income  

  1. Monthly/uncommuted pension: Taxable in case of all employees
  2. Commuted pension:

    i) Government employee
    – Exemption is available under section 10(10A)

    (Central/state/PSU/local authority/statuary Corporation)

    ii) Non-Government employee

Receiving Gratuity with pension

Not Receiving Gratuity with pension

1/3 of 100% of commuted pension is exempt

½ of 100% of commuted pension is exempt

Income Tax Treatment for Pension Scheme of Central Government Employees

Pension scheme in case of an employee joining central government on or after jan,1,2004

  • It is mandatory for persons entering the services of the CG on or after Jan.2004 to contribute 10% of salary every month towards their pension account & Govt. also contribute at the same rate
  • Salary= Basic pay + D.A.(if)
  • Contribution by CG is included in salary of employees
  • Deduction u/s 80C will not be available if deduction is claimed u/s 80CCD
  • When pension is received out of the aforesaid amount it will be chargeable to tax in the hand of family member in the head income from other sources

Reference: Section 10(19) of Income Tax Act, 1961 and Rule 2BBA of Income Tax Rules

Section 10(19) of Income Tax Act: Income Exempted from Income Tax

(19) family pension received by the widow or children or nominated heirs, as the case may be, of a member of the armed forces (including para-military forces) of the Union, where the death of such member has occurred in the course of operational duties, in such circumstances and subject to such conditions, as may be prescribed.

Circumstances and conditions for the purposes of clause (19) of section 10.

2BBA. (1) For the purposes of clause (19) of section 10, the circumstances of death of a member of the armed forces (including para-military forces) of the Union in the course of operational duties shall be the following, namely :—

(i)  acts of violence or kidnapping or attacks by terrorists or anti-social elements;

(ii)  action against extremists or anti-social elements;

(iii) enemy action in international war;

(iv) action during deployment with a peace keeping mission abroad;

(v)  border skirmishes;

(vi)  laying or clearance of mines including enemy mines as also mine sweeping operations;

(vii) explosions of mines while laying operationally oriented mine-fields or lifting or negotiation mine-fields laid by the enemy or own forces in operational areas near international borders or the line of control;

(viii) in the aid of civil power in dealing with natural calamities and rescue operations;

(ix) in the aid of civil power in quelling agitation or riots or revolts by demonstrators.

(2) It shall be certified by the Head of the Department where the deceased member of the armed forces (including para-military forces) last served, or the service headquarters, as the case may be, that the death of such member has occurred in the course of operational duties in circumstances mentioned in sub-rule (1).

 

8 thoughts to “How to Calculate Income Tax on Pension Income”

  1. whether gross pension is taxable or net pension of Bank retired employees( Net means after recovery of Commutation{1/3rd of Basic Pension} )
    please guide us about same.

  2. thank u. for assessment year 13
    -14 , if ther is only 1 house and if it is loss then return in ITR-1 sahaj to be filed or ITR -2 is to be filed

  3. Sir,
    Retired from Public Sector Bank. Gross Pension after deduction on account of Commutation is Rs.294700/- An amount of Rs.5571/- is deducted monthly on account of commutation of pension. Total pension inclusive of commutation works out to be 361548. A tax of Rs.212/- is deducted from the pension disbursed. Would like to know how the calculations arrived

    1. Anirudh ji, Income tax upto Rs 2 Lakhs is not taxable
      and in case of pension income additional deduction if you are receiving gratuity then 1/3rd of total computed pension is exempted from income tax and if not receiving gratuity then 50% of f total computed pension is exempted from income tax.
      Since you are bank employee you must be receiving Gratuity Income, so 1/3rd of commuted pension income will be exempted

  4. I am a central GOV. Pensioner, drawing pension ,after availing commutation of 40% af my basic pension.
    Now about 10,000 /- pm deducted from my pension as ‘Commutation Amount’.
    Please advice me whether I have to pay income tax on the amount deducted as ‘Commutation Amount’ .

    1. Sakshi ji, there are two things widow receiving the income as pension will be taxed in hands of widow and second thing if she receive certain payment already due to spouse before death and she receives them then she/he has to file income tax return as representative assesseee

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