How to calculate exemption on Pension income
There are two type of pension viz; Commuted and Uncommuted Pension. Treatment of both type of pension is different as per section 17(1)(ii) of Income Tax Act,1961. Normally pension is paid after death or retirement of employee by his/her employer as monthly payment but when employer pays any lump sum payment, it is known as commuted pension. Treatment of Exemption on both type of pension is as under:
For Government or non-Government employee, uncommuted pension is fully taxable.
1. Commuted pension received by employee of local authority, Government organisation or statutory corporation under Civil Pensions (Commutation) rules of the Central Government or under any other similar scheme is wholly exempted from tax as per Section 10(10A)(i). Also in following cases pension is exempted from Tax.
- Pension received from UNO by employee or his/her family members
- Judges of High Court and Supreme Court
- Family pension received by family members of armed forces.
2. Commuted pension received by any other employee:
- Employee receive Gratuity also: In case employee receive gratuity along with pension, commuted value of one-third of pension which normally he/she is entitled to receive is exempt from tax
- Employee doesn’t receive Gratuity: Commuted value of one-half of such pension is exempt from tax.
When pension amount received by employee exceed exemption limit as mentioned above, such exceed amount is liable to tax when it is due or paid.
Family pension received by family members of employee is taxable in the hands of recipients under head “Income from other Sources “and not under head “Income from Salary”.