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Taxability of Pension received

Pension is taxable on the basis of its source. There are two main sources of pension: image
  • from employer and 
  • family pension
Pension received is taxable in both the cases but the rules for taxability are different.

Pension received from Employer:

Pension is received from employer in terms of agreement of services. This is to ensure some source of earning even after retirement to employees and is considered a part of Social Security for retired employees.

Corpus / Fund for payment of pension are generally created during the tenure of the service of the employee from a contribution by employee or employer or a combination of employee and employer contribution.

Generally Employees have an option to commute some part of their pension at the time of their Retirement. Taxability of Commutation of Pension is dealt by Section 10(10A) of the Income Tax Act.

  • Full commutation amount received by Government Employees as per Civil Pensions (Commutation) Rules are exempt.
  • In other cases following amount received towards commutation of pension is exempt:
    • In case where employee receives gratuity, one third value of total entitled pension amount.
    • In case where employee does not receive gratuity, one half of the pension which employee is entitled for.
Regular periodic pension received from Employer is taxable as Income from Salary. TDS is deducted at source from pension payment as applicable in case of salary payment and Form 16 (TDS Certificate) is issued for the same.

There is no option to avoid TDS from pension even by submitting any form like Form 15G/15H. This option is available only in case of interest income (Form 15G/15H).

Taxability of Family Pension

Family Pension is received by the family of the employee after the death of the employee. Since, there is no employer – employee relation between recipient of pension and employer, Family Pension is treated as Income from Other Sources.

Standard deduction equivalent to 1/3rd pension amount subject to maximum of 15000/- is available under Section 57 of the Income Tax Act.

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