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CA Sanjiv Kumar
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Enlightened
Asked: 2021-07-21T22:48:56+05:30 In:

How income tax on pension is calculate?

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How income tax on pension is calculate?
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    1. Enlightened

      Hi, The taxability of Pension depends on two factors. First Type of Pension and second type of Employee. The pension is taxable under the head of “Salary” in the hands of the receiver and in the year of receipt and tax is calculated in the following manner: Uncommuted pension i.e. periodical pensionRead more

      Hi,

      The taxability of Pension depends on two factors. First Type of Pension and second type of Employee. The pension is taxable under the head of “Salary” in the hands of the receiver and in the year of receipt and tax is calculated in the following manner:

      Uncommuted pension i.e. periodical pension It is fully taxable in the hands of all employees, whether government or non-government.
      Commuted Pension a) Government employee or employee of local authorities or statutory corporation: Fully Exempted [section 10(10a)(i)] 

      b) Non-Government Employee

      Any commuted pension received is partially exempt from tax in the following manner:

      If the employee is in receipt of gratuity

      Exemption = 1/3 X (100% of Commuted Pension*) *if the employee has commuted the whole of the pension.

      If the employee does not receive a gratuity

      Exemption = 1/2 X (100% of Commuted Pension*) *if the employee has commuted the whole of the pension.

      Caution: Exemption shall be allowed to the extent it is allowed to be commuted and the balance uncommuted Pension received periodically will be fully taxable.

      For example:- Mr. A is drawing a salary of Rs. 20,000 p.m. at the time of retirement and retires from service and becomes entitled to receive a pension of Rs 10,000 p.m. He gets half his pension commuted and receives Rs. 1,50,000/- as lump sum payment. Henceforth, he shall be entitled to a pension of Rs. 5,000 p.m. (If Ram commute his full pension then he will receive Rs 3,00,000)

      Taxability:- 

      1. Uncommuted Pension of Rs 5000 P.M is fully taxable.
      2. Commuted Pension of Rs 1,50,000/-

      If A is a Government Employee: Rs 1,50,000 is fully exempted.

      If A is a non-Government Employee and also receiving Gratuity:

      Exempted pension will be =  Rs 1,00,000 (1/3 X 3,00,000) and the taxable amount will be Rs 50,000/-

      If A is a non-Government Employee and not receiving Gratuity:

      Then Exempted pension will be =  Rs 150,000 (1/2 X 3,00,000) and the taxable amount will be Rs Nil.

       

       

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