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Income Tax for Pensioners - Taxation Rules, Calculation
Income tax is a government-imposed levy on the earnings of both individuals and entities. The rates and regulations governing income tax differ based on the nature and origin of income, as well as the taxpayer's age and residential status. Pensioners, individuals who receive regular payments from a fund or employer post-retirement, are subject to income tax on their pension income. Nevertheless, pensioners also enjoy specific benefits and exemptions under the Income Tax Act of 1961, aimed at reducing their overall tax liability.
Budget 2023 Update: Standard Deduction on family pension under the new tax regime: Rs 15,000 or 1/3rd of the pension amount, whichever is lower.
Are Pensions taxable?
Pension is taxable under the head salaries 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.
Commuted and Uncommuted Pension
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. Commuted pension means you can receive a certain percentage in advance. Commuted or lump sum pension received by a government employee is tax exempted.
Taxability of Commuted and Uncommuted Pension
- Commuted Pension: A commuted pension refers to a pension converted into a lump sum payment or a series of payments.
- 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 1/3rd of the commuted pension amount is exempt from taxes, while the remaining amount is 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. “The golden rule of pension says that UNCOMMUTED PENSION is ALWAYS TAXABLE.”
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.
Which Head of Income Should Pension Income be Disclosed Under?
- To find an answer to this, we need to divide our discussion into two parts
- If the pensioner himself is receiving a pension
- When family members are receiving the pension amount
- In the first instance, income should be disclosed
- As par with salary income and shown in form?ITR-1
- As income received in the hand of the pensioner is mostly routed through the bank and not from the employer, while claiming TDS (if any) TAN of the issuer, i.e., the bank shall be quoted.
- Confusion arises in tax filers' minds about 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 have 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 is that 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 an exempt minimum of Rs.15,000/- or 1/3rd of the pension amount.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Validate and File: Once you have accurately entered all the necessary details, validate the information and file your income tax return.
Receiving a pension relieves us, but thinking about tax filing frightens us. But not anymore!! For any further information desired, and if you are looking for any help with filing your return and managing taxes, Our Tax Advisory Service helps you save taxes by maximizing your deductions.
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.
Frequently Asked Questions
Q- What is the tax-free allowance for pensioners?
Senior citizens are allowed a standard deduction of ₹50,000 for their pension income, including family pensioners who can avail of deduction benefits up to Rs 15,000. An uncommuted or monthly pension is taxable as a 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 and 80 years of age enjoys a basic exemption limit of Rs 3 lakhs. And a senior citizen above 80 years of age enjoys a basic exemption limit of Rs 5 lakhs.
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 for nonpayment of taxes if you attain a particular age. How are pensions taxed?
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 the Army taxable?
Taxability of pension depends upon the type of pension, which is given below:-
- Uncommuted Pension: Uncommuted pension is fully taxable in the case of government or non-government employees. This pension is received periodically.
- Commuted Pension: It is received in a lump sum. The 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 of the pension amount is exempt if the pension is received with the gratuity OR 1/2 if not received with the gratuity.
Now, let us understand the taxability of Pensions received from the armed forces.
- Fully Exempt if
- Received as a lump-sum amount or
- Received by family members
- Fully Taxable if
- Received periodically