All About Income Tax for Pensioners

Income tax is also applicable for people who survive and make ends meet through their pension. A pension is a regular payment made by the state to people of or above the official retirement age and to some widows and disabled people. Also, if a salaried individual is retired from employment, typically because of age or ill health, then a pension is paid to them.

Income Tax Rules for Pensioners

In the recent Union Budget 2018, a standard deduction of Rs. 40,000 was introduced with respect to miscellaneous medical expenses and transport allowance. This tax reform intends to offer tremendous benefits to pensioners and salaried employees.

Under Section 60 of the CPC and section 11 of the Pension Act, ‘pension’ is described as an allowance (periodical) or a stipend given for any past service rendered to an organisation and/or special merits. To begin with, pension is compensation offered for past service rendered in an employer-employee relationship. Pension paid is based on a previous agreement of service and is not an agreement which only ends upon the death of an employee. It is imperative to note that the pension amount which is received from a previous employer is taxed under the head of ‘Salary’. This results in several deductions on salary income such as under section 89(1), where it is granted to individuals who get their pension from a nationalised bank and disbursing and drawing officers. Similarly, adjustment in terms of tax rebate under sections 88 and 88B is done by the bank during tax deduction at source from the pension.

Income Tax Form for Pensioners

The Government of India has notified four Income Tax returns forms which are applicable to Hindu Undivided Family (HUF) and individual.

Form No. ITR 1: Also popularly known as Sahaj (easy), this form can only be filed by an individual assesse. It is vital to take note that this form can only be used by an individual who has salary as his/ her source of income and not any business enterprise owned by him/her.

Form no. ITR 1 is a means by which pensioners can file their income tax returns. This form is also used by majority of salaried taxpayers who own a single house and have their income which is taxable (i.e. income from other sources) in addition to their pension.

Calculation of Income Tax for Pensioners

Your pension is taxed as your salary income. In this, the pension amount is taxed under the head ‘Salary’ in your Income Tax Return form. While pension is paid on a monthly basis, there is also an option of receiving it as a lump sum in the form of commuted pension. On the other hand, pension paid on a periodical basis, which is commonly known as uncommuted pension can be fully taxed as salary.

In some particular cases, commuted pension may be exempted from tax like pension received by any of your family members which is taxed under the head income from ‘other sources’, if it is in the form of a lump sum payment. Likewise, uncommuted pension which is received by any of your family members is exempt up to 1/3rd of the pension amount or Rs. 15,000, whichever is less. However, any pension from the United Nations Organisation under section 2 of the UN privilege and immunities act, 1947 is allowed to be exempt from tax as is pension received by kin of Armed Forces.

Under section 57, family pension is described as a monthly amount paid to a person belonging to the family of an employee by the employer in the event of the unfortunate demise of the employee of an organisation. As there is no employer-employee relationship in this scenario, family pension is taxed as Income from Other Sources.

How much tax is to be paid on an individual’s pension?

If the taxable income of an individual is above the exemption limit, he or she has to file for tax returns. Pension income from an employer is taxed as salary income, whereas the interest on various investments is taxed as income from other sources. When it comes to Public Provident Fund (PPF), the interest income is tax-exempt. If the pensioner’s taxable income i.e., pension in addition to taxable interest minus investments such as PPF, health premium which are eligible for deduction, is above the exemption limit in an assessment year, you are liable to file your Income Tax returns. The commuted pension in case of central/state government and defence services employees under the central/state acts is tax exempt. The same is partially exempt for non-government employees. If non-government employees receive gratuity along with pension, only 1/3rd of the pension is exempt while the remaining amount is taxable as salary, provided 100% of this pension is commuted. If non-government employees receive only pension, then 1/2 of pension amount will be exempt from tax, if 100% of that amount is commuted.

TDS Pensioners

TDS provisions are applicable as is the case for salary income, if you as a pensioner receive your pension via a nationalized bank. Nationalised banks are allowed deductions as per chapter VIA. Similarly, banks are also allowed to grant relief under section 89(1) for any pension arrears. It is imperative to note that TDS is not deducted on family pension as the latter does not come under the ambit of section 192 of the Income Tax Act, 1961.

FAQs

What is a pension?

According to Wikipedia, “A pension is a fund into which a sum of money is added during an employee's employment years, and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a "defined benefit plan" where a fixed sum is paid regularly to a person, or a "defined contribution plan" under which a fixed sum is invested and then becomes available at retirement age. Pensions should not be confused with severance pay; the former is usually paid in regular instalments for life after retirement, while the latter is typically paid as a fixed amount after involuntary termination of employment prior to retirement.”

Which act is responsible for pension payments in India?

There is a separate Pension Act, 1871, that regulates the pension payment process for eligible pensioners in India. The Pension Act is an Act to consolidate and amend the law relating to pensions and Grants by Government of money or land-revenue.

What is the retirement age of a salaried individual in India and when does he/she start receiving pension?

As per RRA, the retirement age in India is 62 years. However, the employer is required to offer re-employment to eligible employees who turn 62, up to the age of 65 years. For employees eligible for pension, pension starts within 4 to 12 weeks of retirement as it takes a considerable number of weeks to process the retirement fund pay-out.

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