All About Income Tax 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.

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.

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.