Income Tax for Pensioners - Taxation Rules, Calculation

Is Pension taxable?

Pension is taxable under the head salary in your ITR. According to the rules of taxation, an uncommuted pension is viewed as a salary under the Income Tax Act of 1961, and therefore, pension earners are required to file an Income Tax Return.

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Commuted and Uncommuted Pension

Usually, both the employer and the taxpayer contribute to an annuity fund, which later provides the taxpayer with a pension. At retirement, you can choose to receive a portion of your pension as a lump sum instead of getting the full amount in regular installments.

An uncommuted pension refers to a pension plan or benefit that has not been converted into a lump sum or regular payments. This means you can receive the pension as periodic payments, usually monthly. Uncommuted pension or any periodical payment of pension is fully taxable as salary.

When a pension is "commuted," the pension amount is converted into a different form, typically a lump sum or a series of regular payments. A commuted pension means you can receive a certain percentage in advance, and the remaining amount is then paid as reduced regular payments. Commuted or lump sum pension received by a government employee is tax exempted.

Here's a table summarizing the key differences between Uncommuted and Commuted Pensions:

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Commuted and Uncommuted Pension Income Taxability

• Commuted Pension: A commuted pension refers to a certain amount of pension converted into a lump sum payment and the remaining as a series of payments, usually monthly.
• Commuted or lump sum pension received by a government employee is generally exempt from taxes.
• For non-government employees, the tax treatment of commuted or lump sum pensions depends on whether gratuity is also received:
  • If a person receives both gratuity and pension and 100% of the pension was commuted, then one-third of the commuted pension amount is exempt from taxes, while the remaining regular payments are taxed as salary.
  • If a person does not receive gratuity but only receives a pension, and 100% of the pension was commuted, then 1/2 of the commuted pension amount is exempt from taxes.
• Uncommuted Pension: An uncommuted pension refers to a pension that remains in its original form, typically a regular income stream paid over a period of time.

Note:- The golden rule of pension says that UNCOMMUTED PENSION is ALWAYS TAXABLE.

Example:
If Mr. Shrama is eligible for a total pension of, 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 Rs. 01 lakhs or 02 lacs or 05 lakhs in one go and the rest in periodic installments.

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Where to Report Pension in ITR?

Accurately reporting your pension income and employer details in your income tax return helps you comply with tax regulations and avoid penalties. Here’s how to do it:

Reporting Uncommuted Pension

If you are receiving a regular monthly pension (uncommuted), you need to report it under the “Income from Salary” section of your ITR. Choose the correct ITR form based on your total income. If your income includes only salary, one house property, and other income (excluding lottery winnings or racehorse income) and is up to ₹50 lakh, you can use ITR-1 (Sahaj). Otherwise, you should file ITR-2. Make sure to include the total pension amount received during the financial year. Also, provide details of the pension-paying organization, including the name, address, and TAN. If your pension is paid through a bank, enter the bank’s details instead.

Reporting Family Pension

If you receive a family pension (as a nominee or family member of a deceased employee), you should report it under the “Income from Other Sources” section. You can claim a standard deduction of ₹15,000 or one-third of the total family pension, whichever is lower. The remaining amount is taxable. Use ITR-1 if you meet the eligibility conditions; otherwise, use ITR-2. Include the name and address of the organization or bank paying the family pension.

Reporting Commuted Pension

If you receive a lump sum commuted pension at the time of retirement, report the exempt portion under the “Exempt Income” section (Schedule EI) of your ITR. For non-government employees, any taxable portion of the commuted pension should be included under the “Income from Salary” section.

TDS on Pension

If tax has been deducted at source (TDS) on your pension income, ensure you collect Form 16 (for salary pension) or Form 16A (for other income) from the pension-paying authority. Report these TDS details in the “Tax Details” section of your ITR.

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How to Report Pension Income and Employer Details in the Income Tax Return

Reporting pension income and employer details in the income tax return can vary based on the type of pension and the nature of employment. Here are the general steps to report pension income and employer details:

1. Obtain Form 16/Pension Statement: If you are a salaried individual receiving a pension, your employer should provide you with Form 16, which contains details of your salary, tax deducted, and other relevant information. If you are receiving a pension from a government or other sources, you should receive a pension statement with the necessary details.
2. Understand the Type of Pension: Pension income can be classified into two categories:
   • Uncommuted Pension: If you receive the full pension amount without any lump sum withdrawal, it is considered an uncommuted pension.
   • Commuted Pension: If you have received a lump sum amount from your pension, and the remaining pension is received as a regular payment, it is considered a commuted pension.
3. Report Pension Income in the Appropriate Section: In your income tax return, report your pension income in the appropriate section, depending on the source of the pension. Usually, pension income is reported under the head "Income from Salaries" for government pensions or "Income from Other Sources" for other pensions.
4. Enter Employer Details: In the income tax return form, there will be a section where you need to enter the details of your employer or the pension provider. This includes the name, address, and tax identification number (TAN) of the employer/pension provider.
5. Declare Commuted Pension Details (if applicable): If you have received a commuted pension, there might be a separate section in the income tax return form where you need to declare the commuted amount and other relevant details.
6. Claim Deductions (if applicable): Based on your pension type and other factors, you may be eligible to claim certain deductions related to pension income, such as the standard deduction or deductions under Section 80TTB (for senior citizens). Ensure that you check the relevant deduction options available to you.
7. Validate and File: Once you have accurately entered all the necessary details, validate the information and file your income tax return.

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New Tax Return Regulations for Senior Pensioners

Starting from the financial year 2022-23, senior citizens are exempt from filing income tax returns if their income comes solely from pensions and interest earned from the same bank account. However, to avail of this benefit, they will need to submit a declaration to the bank in which their pension credits. The bank will then deduct tax at source on the pensioner’s behalf as per Section 194P of the Income Tax Act.

Taxability of Pension Received from UNO or Armed Forces

Pensions received by employees of the United Nations Organisation (UNO) or their family members are fully exempt from income tax in India. Similarly, family pension received by the dependents of armed forces personnel is also exempt from tax.

ITR filing for FY 2024-25 is about to begin, and this is your chance to file your ITR accurately and avoid income tax notices and penalties. Therefore, it is advisable to seek help from experts. From tax planning to tax filing and notice resolution, Tax2win’s experts can help you with everything related to taxes. Book an online CA now!

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