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Pension Taxation Rules

Pension Taxation Rules

Income tax is the backbone of any nation. Income tax must be paid honestly for the proper growth of country. I’ve seen many people always confused about income tax. They just don’t know about how to calculate tax they need to pay on their income. A big portion of population finds itself in dilemma whenever it’s about income tax on pension income.

If you are among such, then this post is nothing less than a boon for you, as it covers everything you need to know about income tax on pension income. Just keep reading ahead to clear the air of doubts that you might be having regarding income tax on pension income after retirement.

Income Tax on Pension Income

The income tax on pensions depend on the situation your pension fits in. Confused? Don’t panic! I’m covering the income tax details section-wise.

Tax Treatment of Pension

Before I proceed ahead providing you details, let me drop light on tax treatment of pension. To put in the shortest words, Pension is retirement benefit. Needless to mention that it is payable to any particular employee or to anyone dependent on him/her, depending on his/her past employment.

tax on pension income

Under section 192 of Income Tax act on payment, tax is payable on the pension income. So those who think there is no income tax to be paid on pension income, get your facts updated.

One thing to be mentioned here is that if the pension income is received by dependents of employee, then it is taxed under head income from other sources. The family pension is not covered under section 192, therefore TDS is not deductible on it whatsoever.

  • In case the pension is received from UNO by the employee him/herself or any of the family members, then it is not chargeable on tax at all.
  • In case of family members of armed forces, after the death of employee, whatever family pension is received, is exempted from income tax. It is exempt under section 10 (19) in some cases.
  • In the cases other than armed forces, after the death of employee, whatever family pension is received, is taxable in recipients’ hands. It is so under section 56 under the head ‘income from other sources‘. Under the section 57, standard deduction is available. This deduction is 1/3 of the pension, or is Rs. 15,000. The one which is lower is what the recipient need to pay.
  • There are different cases in case of pension received by an employee during his lifetime. Tax treatment varies as per the situation in this case. It varies depending on whether pension is commuted or not.

1. Uncommuted Pension

Most of people like to get pension monthly. This periodic pension is known as uncommuted pension. One always needs to pay income tax on such pension.

2. Commuted Pension

Sometimes, recipients like to opt for the method of getting lumpsum amount than receiving it periodically. Such pension is known as commuted pension. In such pension, tax treatment varies as per the case.

  • For all Govt. Employees there, the pension is totally exempt from tax.
  • For other employees, there are further two cases:
  1. In case the gratuity is received, 33 percent of whatever normal pension is recipient is liable to receive, is exempt from tax.
  2. In case the gratuity is not received, one half of whatever normal pension the recipient is liable to receive, is exempt from tax.

Pension Taxation Rules

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