All you need to know about tax on pension

Tax on Pension

The golden years after retirement, which would, in today’s world be above 65 years of age, is the time where one wants to relax and enjoy the fruits of all the labor put in for the last 40+ years of life. If you are lucky or have planned well, you will have a monthly pension to cover your expenses as well as finance the dreams you may have been putting off while you were employed. This could be anything from enrolling for that hobby class you’ve always wanted to go for or going on frequent weekend trips with your spouse, family members, or friends.

The golden years are the years where you should be able to do anything you want without the encumbrance of time or money. You do not need to get leave sanctioned nor do you have to be at work at any specific time anymore. The only thing that can put a dampener on your spirits could be the thought of paying tax on your precious pension. Here’s all you need to know about paying tax on pension in India. To understand better way visit here tax rates for different income ranges for senior citizens

To answer the first question, which is, is a pension in India taxable? The answer is yes, it is fully taxable. On your income tax returns form, you can see the heading ‘Income from Salaries’. This is the category under which your pension will fall.

Different modes of pension

The pension can be paid monthly or if the pensioner so chooses, it can be paid out as a lump sum. The pension can also be paid out in advance which is then known as a commuted pension. In such a case, you would have to forgo an amount from your pension for a certain number of years (not exceeding 15 years) in exchange for the lump-sum amount. Commuted pension is the lump sum while the balance amount is called un-commuted pension. When the period of 15 years is completed, the amount of pension is restored to the original amount.

There are different percentages of pension one can commute depending on one’s service category.
Defense personnel can commute approximately up to 50% while government civilian employees can commute approximately 40%. Since only the basic salary is reduced, the dearness allowance will continue to be paid out for those years for defense personnel.

Tax implications for commuted and un-commuted pensions

For commuted and un-commuted pensions, there are different tax calculations.

For commuted pensions: Government employees are exempt from tax when it comes to commuted pensions. For private sector employees, however, if the pension is along with a gratuity, then one-third of the complete pension is tax-exempt while the balance amount is taxed just like the salary. If the pension is without gratuity, then half of the complete pension is tax exempt while the balance amount is taxed just like salary.

In the case of un-commuted pension, which is like regular payments made every month, then for both government and private sector employees, the tax calculation is the same as the salary. For the financial year 2019-20, you can claim Rs.50,000 as a standard deduction.

Family pension

Family pension is any pension that the spouse or children below 25 years of age receive after the demise of the pensioner. This should be filed under ‘Income from Other Sources’ in the income tax return form. For family pension, any commuted (lump-sum amount) pension received is not taxed. Monthly payments, however, are taxed if it is more than Rs.15,000 or if it amounts to 1/3rd of the amount of pension (whichever is lesser will be taxed). However, if it is pension received by members of the family of Armed Forces personnel, it is fully exempt from tax.

Reducing tax liability on pension

There are many ways in which you can reduce taxes on your pension apart from the standard deduction of Rs.50,000 per year. There are different sections under the Income Tax Act that give you deductions for investments which you can make with your pension amount. Some of these sections are under the Income Tax Act Section 80C, 80TTB, 80DDB, and 80D.

One of the ways to get a deduction under Section 80C is by investing in a Senior Citizens Savings Scheme (SCSS). However, the deductions under Section 80C are collective deductions which cannot exceed Rs.1.5 lakh on an annual basis.

Apart from this, senior citizens also get tax deductions of up to Rs.50,000 for interest earned from bank deposits, post office deposits, and deposits in cooperative societies.

Senior citizens also get tax exemptions if they have spent up to Rs.1 lakh a year on the medical treatment of dependents (spouse, children, siblings, or parents). However, there is a list of specified illnesses for which you can claim this deduction. You can also claim up to Rs.50,000 as a tax deduction for premium paid on health insurance policies.

With meticulous financial planning, the post-retirement years can be joyful and stress-free. Tax need not be something to worry about if you take the steps noted above.

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