TAXABILITY OF COMMUTED PENSION

1. Any payment on commutation of pension received by all Central and State Government
Employees is fully exempt from tax.
2. In case of other employees taxability depends on whether employee received gratuity also on
retirement.

TAXABILITY OF COMMUTED PENSION
Exemption is restricted to the following: ‐
1. In case where employee received any gratuity, commuted value of 1/3rd pension is exempt.
2. In case where employee did not receive gratuity (i.e. he received only pension) commuted value
of half of pension is exempt.

TAXABILITY OF COMMUTED PENSION
Any payment received by way of commutation of pension from a fund under clauses 23 AAB (i.e.
fund set up by LIC of India viz Jeevan Suraksha) under pension scheme approved by controller of
Insurance is fully exempt from tax.
New Pension Scheme for Central Govt. Employees
New pension scheme is applicable to new entrants to Government service. As per the scheme it is mandatory for persons entering the service of the Central Government on or after January 1, 2004, to
contribute 10 per cent of salary every month towards their pension account. A matching contribution is
required to be made by the Government to the said account.

TAXABILITY OF COMMUTED PENSION
The tax treatment under the new scheme is as follows –
1. Contribution by the Central Government to the pension scheme is first included under the head
“Salaries” in hands of the employee.
2. Such contribution is deductible (to the extent of 10 per cent of the salary of the employee) under
section 80CCD.
3. Employee’s contribution to the pension scheme (to the extent of 10 per cent of the salary of the
employee) is also deductible under section 80CCD.
4. When pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of
the recipient.
5. The aggregate amount of deduction under sections 80C, 80CCC & 80CCD cannot exceed ` 1, 00,000.
6. “Salary” for the purpose of points 2 and 3 (supra) includes basic salary and dearness allowances (if
the terms of employment so provide) but excludes all other allowances and perquisites.
7. No deduction will be allowed under section 80C in respect of amounts on which deduction has been
claimed under section 80CCD.

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