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Income Tax for Pensioners - Calculation of TDS on Pension

Updated on: 21 Jul, 2022 06:24 PM

It was the time of month again, when pension will be credited to Mr Sharma’s account. While being delighted by the thought…suddenly he realised, he skipped filing ITR for AY 2020-21 and AY 2021-22. And, the last date of filing has approached quite close (i.e. 31st March 2022).
Mr. Sharma didn’t forgot to file his return by the due date, rather, he kept on delaying because he was unsure about the manner one should file Income Tax Return for Pension Earners.. Through this blog post we try to help Mr. Sharma and all those stuck in same situation. Lets decode the return filing for pension earners today

Are Pensioners required to file Income Tax Return?

Yes, pension earners are required to file Income Tax Return if their total income (before claiming deductions under section 80C to 80U) exceeds

  • Rs.2.5 lakhs (age of pensioner being less than 60 Years)
  • Rs. 3 lakhs (age of pensioner being 60-80 Years)
  • Rs. 5 lakhs (age of pensioner being above 80 Years)

We are talking about total income and not just your pension income. In case you have earnings from any house property like rental income or other sources like interest etc, your aggregate income from all sources should be considered in checking above limits.

Pension income should be disclosed under which head of income?

To find an answer to this, we need to divide our discussion in two parts

  • If pensioner himself is receiving pension
  • When family members are receiving the pension amount

In the first instance, income should be disclosed

  • At par with salary income and shown in form ITR-1
  • As income received in hand of pensioner is mostly routed through the bank and not from the employer, while claiming TDS (if any) TAN of the issuer i.e. bank shall be quoted.
  • A confusion arises in the minds of tax filers about what shall be the credentials to enter if income is shown as salary income. The employer details shall be the details of your last employer.

(The tax implications arising in case of pensioner receiving the amount has been explained below)

In cases where family members receive the pension, after the demise of the pension holder, it shall be shown as Income From Other Sources. The reason being the pension does not accrue because of any service rendered to the employer by the family members.
Commuted i.e. lump sum pension received by family members is EXEMPT from tax.
Uncommuted pension i.e. pension received periodically by family members is exempt minimum of
Rs.15,000/- or 1/3rd of pension amount

pensioner taxability tax2win

What are the tax implications if pension is received by the pensioner himself?

For understanding the tax implications here, first we need to understand that pension can be categorised into two parts

Commuted pension

Commuted pension means amount of pension received in lump sum. It can be the complete pension or a specified part of total pension.
If Sharma ji is eligible for a total pension of say Rs.10 lakhs, he can opt to seek a complete amount of Rs. 10 lakh in lump sum as commuted pension. Otherwise he can also seek any part of it, say Rs. 01 lakhs or 02 lacs or 05 lakhs in one go and rest in periodic installments.

Uncommuted Pension

Uncommuted pension is pension received periodically, and this period is normally fixed at monthly rests.
“The golden rule of pension says that UNCOMMUTED PENSION is ALWAYS TAXABLE”

Taxability of commuted pension

Commuted pension when received by government employees OR employees retiring from defence services it is FULLY EXEMPT from levy of taxes.
For Non Government employees (if 100% pension is commuted), the exemption granted is partial depending upon whether a person also receives gratuity.

  • In case a person earns both PENSION + GRATUITY -> 1/3rd of amount received as pension is exempt from levy of taxes
  • In case a person earns only PENSION -> 1/2 of amount received as pension is exempt from levy of taxes

Receiving pension gives us a sigh of relief but thinking about tax filing frightens. But not any more!! For any further information desired post your comments below and if you are looking for any help with filing your return and managing taxes Contact us now!!!!

Frequently Asked Questions

Q- How many times PF advance can be withdrawn?

PF can be withdrawn maximum 2/3 times during service period on non-refundable basis. You can withdraw maximum o6 month on the gross pay on refundable criteria during the tenure of service.There should be a minimum gap of 6 months between two lo

Q- What happens if PF is withdrawn before 5 years?

Yes, It is possible to withdraw the PF amount if you leave your current company before 5 years of service. The amount withdrawn will be taxable in case it is withdrawn before completion of 5 years.

Q- Is TDS deducted on PF withdrawal?

TDS is deducted @ 10% on EPF balance if withdrawn before 5 years of service. If withdrawal amount is less than Rs 50,000 no TDS is deducted.

Q- Is a PAN card mandatory for PF withdrawal?

PAN is required during EPF withdrawal/settlement if you do not want some excess tax to be deducted from your EPF account. If you fail to submit PAN, the tax deducted at source (TDS) can be as high as 34.6%.

Q- Is TDS deducted every month from salary?

As per Section 192 , tax is required to be deducted at source from salary at the time of its payment. Hence, we can say that TDS has to be deducted every month from salary if it is expected at the beginning of the year that it will exceed the basic exemption limit at the end of the financial year. However, if the fact that it exceeds BEL comes to be known at the end of the year, then monthly TDS is required to be deposited at the year end with interest.

Q- What is the section for TDS on salary?

The section for TDS on salary is Section 192 of The Income Tax Act, 1961.

Q- What percentage of TDS is deducted?

TDS on salary is deducted at the average rate of income tax for that financial year. The average rate of income tax has to be calculated on the basis of income tax slab rates in force for that year.

Q- What is the tax free allowance for pensioners?

The tax free allowances for pensioners in India are the same as those for salaried individuals. This includes the standard deduction of Rs 40000 for AY 2019-20, available to salaried individuals. Uncommuted or monthly pension is taxable as monthly salary. However, a commuted or lump sum pension is exempt from tax to a given extent only under Section 10(10A).

Q- How much can a senior citizen make without paying taxes?

A senior citizen between 60 to 80 years of age enjoys a basic exemption limit of Rs 3 lakhs in AY 2019-20. And, a senior citizen above 80 years of age enjoys a basic exemption limit of Rs 5 lakhs in AY 2019-20.

Q- How much can a retired person earn tax free?

The normal basic exemption limits apply to a retired person as they apply to a non retired person depending on the age criteria. There are no separate tax slabs for retired persons.

Q- At what age do you stop paying taxes?

There is no such provision of non payment of taxes if you attain a particular age.

Q- How are pensions taxed?

Pension is taxed as salary if it is uncommuted. However, if it is commuted it is taxable as salary but it is also subject to a certain prescribed amount of exemption as per section 10(10A).

Q- Is the pension income received from Army taxable?

Taxability of pension depends upon the type of pension which is given below:-
1. Uncommuted Pension: Uncommuted pension is fully taxable in the case of government or non - government employees. This pension is received periodically.
2. Commuted Pension: It is received in lump-sum.Taxability of commuted pension is given below:-

- In the case of government employees, it is fully exempt.
- In the case of non- government employees, 1/3rd amount of pension is exempt if pension is received with the gratuity OR 1/2 if not received with gratuity.

Now, let us understand the taxability of Pension received from the armed forces

  • Fully Exempt if
    1. Received as a lump-sum amount or
    2. Received by family members
  • Fully Taxable if
    1. Received periodically

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.