Income Tax on Pension
Pension is the recurring monetary benefit paid by the former employer to their employees who have retired, as a reward for their past services. Family Pension is the amount received by the family members (spouse, children under 25 years of age) on behalf of the pension holder even after their untimely death.
The pension benefit is generally received by the retired employee as a monthly payment. But sometimes the retired employee may take some percentage of the pension amount as a lump sum amount upon their retirement.
The pension plans in India are regulated by the PFRDA, i.e. Pension Fund Regulatory and Development Authority under the PFRDA Act from 19-Sep-2013 and came into force on 1-Feb-2014.
Is Pension taxable?
According to Income Tax Act, 1961, the income tax on pension will be calculated and paid under the salaries head which includes wages, pension, annuity, gratuity, commission, profits, and transferred balance in provident fund.
In 2021, it was proposed by the government of India to exempt senior citizens from filing taxes on their pensions if their annual income consists of only the monthly pension and its interest. The age consideration here is 75 years and above and it will be applicable from 1 April 2021.
Types of pension as recognized under Income Tax Act
In the annuity fund, both employer and employee contribute together. And at the time of retirement, this annuity fund will be given as the pension to the employee. Pension income is always considered to be an income in the hands of the annuitants. So, the income tax on pension holders is taxed as per their slab.
The pension is of two types:
1. Commuted pension: If you decide to withdraw a part of your pension corpus without converting the same to an annuity, it is called commuted pension. This amount is paid in a lump sum to the employee.
Now, for commuted pension, there are 2 slabs:
- Income tax on pension as an erstwhile government employee is 100% tax-free
- However, Income tax on pensions for non-government employees is partially taxable:
- 1/3rd of the entire corpus is tax-free under section 10(10A) if gratuity, as well as pension, is paid
- ½ of the entire corpus is tax-free if there is no gratuity component
- Income for pension holders from a personal pension plan, you can commute only 1/3rd of the entire corpus tax-free under section 10(10A)
2. Uncommuted pension: The rest of the amount which gets converted to an annuity is called uncommuted pension and is paid to the annuitant as an annuity according to the annuity option chosen.
Family members and pension
The pension can be received by the family members in case of the death of the retired employee. For taxation purposes, the received pension will be taxed under the “income from other sources” head.
- In case of commuted pension received – it is fully exempted from taxation.
- In case of uncommuted pension received – the exemption amount is INR 15,000 or ⅓ of the pension amount whichever is less.
Tax Deducted at Source – TDS on pension
It is generally accepted that TDS will be deducted on all the amount which qualifies under the “salary” head for the purpose of income tax. Hence the TDS will be deducted for the purpose of income tax on pension. The responsibility of filing the TDS is on the employer who has employed the person.
Therefore if the pension is received through nationalized banks then a certain amount will be deducted as TDS.
And if the pension is received through superannuation plans then deducting TDS is the responsibility of the said insurance company.
Can I buy a pension plan for myself?
Yes, you can buy an annuity from any of the pension plans available in the industry. There are some life insurance companies offering annuity plans to their policyholders.
There are two types of annuity plans available in the industry:
- Deferred Annuity
This is when you pay a premium on a monthly or a yearly basis for a specific tenure during which you get to accumulate your pension corpus. Once you reach your retirement age, you have the option to choose the annuity options from the ones available. That is when your annuity starts from the “vesting” age.In this plan, you also have the option to commute 1/3rd of the accumulated corpus at the time of vesting tax-free under section 10(10A), however, an annuity is taxable in the hands of the annuitant.
- Immediate Annuity
This is when you pay the premium in a lump sum and the annuity starts immediately. This is typically opted by people closer to retirement or after retirement. In this plan, you need to choose your annuity option right at the beginning of the plan.
Income Tax for premium payment for pension plans
Premium paid towards pension plans is tax-free up to INR 1.5 lakhs under section 80CCC.
Pension and Income Tax on Pension Return Filing
Pensioners will have to fill Sahaj form for paying income tax on pension amount. The detailing for the Sahaj form should be correct. The filing is divided into 4 parts. It should also be noted that in the union budget of 2018, the government has introduced a deduction of INR 40,000 in terms of medical and transport expenses.
- Part A: Name and date of birth of the pensioner.
- Part B: Furnish the accounts of gross total income which should tally from form 16 and form 12BA.
- Part C: Information of the total tax deduction availed.
- Part D: Details of the bank accounts, details of the advanced tax, and the details of TDS.
Introduction of section 194p
Section 194P is added in a new regime of taxation in the Finance Act 2021. This section provides the whole conditions under which a senior citizen who is 75 years of age and above will be exempted from filing income tax on pension. This section will be applicable from 1 April 2021. This is conditional relief which is conditioned on various exemptions.
Conditions for exemptions under section 194P
- The age of senior citizens should be at 75 years or above to be eligible for this exemption.
- For the eligibility criteria, the senior citizen should have the “resident” status in the previous assessment year.
- His gross income should include only the pension income and the interest on the pension income received from the same bank.
- The central government will notify a “specified bank” that will be responsible for the TDS deduction of the said senior citizen income tax.
Once these conditions are fulfilled, there will be no need to file the income tax by that senior citizen. And the provisions of section 139, which governs the filing of income tax returns by every individual, will not be applicable to that senior citizen.
Pension will be taxed under the “salary” head as salary. The inclusion section 194P will be beneficial for the senior citizens as they don’t have to take stress regarding the taxation purpose and which will be now concerned of the specified bank.
Paying income tax on pensions is the duty of the senior citizen which will be their contribution to the growth of the nation even when they are not actively working for the country whether in the public sector or private sector.