Pension income is taxable in India, but the tax treatment depends on the type of pension received. Regular pension payments are generally taxed as salary. However, lump sum amounts or commuted pensions may be fully or partially exempt depending on the taxpayer’s employment type and eligibility under income tax rules.
Pension is a form of payment made by an employer to an employee after retirement or to the family after the death of the employee, in consideration of past services. It can be received periodically or as a lump sum. A clear understanding of these rules ensures compliance and helps you make the most of available tax benefits.
How to declare pension in ITR?
The following types of pensions are relevant for taxation:
- Uncommuted Pension – Periodical pension received by the employee.
- Commuted Pension – Lump sum payment received in lieu of surrender of a portion of pension.
- Family Pension – Pension paid to an employee’s family members upon the employee’s death.
When filing the Income Tax Return (ITR), pension income must be reported under the appropriate head, typically ‘Salaries’for regular payments. This form of pension, also known as an uncommuted pension, is treated in the same manner as salary income received from an employer.
Although the commuted value of the pension is treated as income, it is exempt from tax up to the limits specified under section 10(10A) of the Income-tax Act. Commutation of pension refers to the option available to a pensioner to receive a lump sum amount by giving up a portion of their monthly pension.
Meanwhile, family pension received by family members after the death of an employee is taxable under the head ‘Income from Other Sources’, according to the Income Tax Department’s website.
Special exemptions
There are certain exemptions under each category, according to the I-T Department’s website. Here are the details.
— Uncommuted pension: A special exemption is available for disabled personnel of the armed forces. In such cases, the entire disability pension, comprising both the service element and the disability element, is fully exempt from income tax, provided the individual has been invalided out of service due to a physical disability caused or aggravated by military service.
However, this exemption does not apply to personnel who have retired on superannuation or otherwise. Since disability pension is exempt from tax, it does not need to be included in salary income for the purpose of tax deduction at source (TDS), according to the Income Tax Department’s website.
— Commuted pension: Payments received by retired employees of the Central or State Governments, local authorities, statutory corporations and members of the defence services are fully exempt from tax.
For a non-government employee, the taxability of the commuted value of the pension depends on whether the employee also receives gratuity at retirement. If they receive a gratuity, one-third of the full value of the commuted pension is tax-free; otherwise, 50% of the commuted pension is exempt from tax. The remaining amount is taxable as salary in the year in which it is received.
— Family pension: A deduction is allowed on family pension, equal to the lower of one-third of the pension or ₹15,000. If the family member’s income is computed under the new tax regime and under section 115BAC, the monetary limit is increased to ₹25,000.
In addition, family pension received by the widow, children or nominated heirs of armed forces or paramilitary personnel is fully exempt from tax if the death occurred during operational duties.
