Commuted Value of Pension Received [Section 10(10A)] – Direct and Indirect Taxes with Tax Ready Reckoner

The commuted value of pension refers to the lump sum amount received by an employee in lieu of a portion of their pension. This is governed by Section 10(10A) of the Income Tax Act, 1961, which provides the rules for its taxability and exemptions.

Table of Contents

Types of Pension Commutation:

Government Employees: Pension received by government employees (Central/State/Local Authority) is fully exempt from tax.

Non-Government Employees: Pension received by non-government employees is partially exempt, depending on whether they are covered under a recognized provident fund or not.

Exemption for Non-Government Employees:

For employees covered under a recognized provident fund:
- The entire commuted value of pension is fully exemptfrom tax.

For employees not covered under a recognized provident fund:

- The exemption is available only for the commuted value of up to 1/3rd of the pension.
- If the employee also receives gratuity, the exemption is limited to 1/3rd of the commuted value.
- If the employee does not receive gratuity, the exemption is limited to 1/2 of the commuted value.

Taxability of Excess Amount:

Any amount received in excess of the exempted limit is taxable under the head “Income from Salaries”.

Maximum Exemption Limit:

There is no specific monetary limit for exemption under this section. The exemption is based on the proportion of the commuted value (1/3rd or 1/2, as applicable).

Summary of Exemptions:

Employee Type	Exemption
Government Employees	Fully exempt
Non-Government Employees (Covered under Recognized PF)	Fully exempt
Non-Government Employees (Not Covered under Recognized PF)	· 1/3rd exempt (if gratuity received) or · 1/2 exempt (if gratuity not received)

Example Calculations:

Case 1: Government Employee

Commuted value of pension received: ₹15,00,000
Taxability: Fully exempt(no tax).

Case 2: Non-Government Employee Covered Under Recognized Provident Fund

Commuted value of pension received: ₹12,00,000
Taxability: Fully exempt(no tax).

Case 3: Non-Government Employee Not Covered Under Recognized Provident Fund

Commuted value of pension received: ₹18,00,000
Gratuity also received: Yes

Exemption Calculation:

Exempted amount: 1/3rd of the commuted value = (1/3) × ₹18,00,000 = ₹6,00,000
Taxable amount: ₹18,00,000 – ₹6,00,000 = ₹12,00,000

Case 4: Non-Government Employee Not Covered Under Recognized Provident Fund

Commuted value of pension received: ₹18,00,000
Gratuity not received: Yes

Exemption Calculation:

- Exempted amount: 1/2 of the commuted value = (1/2) × ₹18,00,000 = ₹9,00,000
- Taxable amount: ₹18,00,000 – ₹9,00,000 = ₹9,00,000

Notes:

1. Commuted Pension vs. Uncommuted Pension:

o Commuted Pension: Lump sum amount received in advance. It is partially or fully exempt as per Section 10(10A).

o Uncommuted Pension: Regular monthly pension. It is fully taxable under the head “Income from Salaries.”

2. No Monetary Limit:

o Unlike gratuity, there is no specific monetary limit for exemption under Section 10(10A). The exemption is based on the proportion of the commuted value.

3. Family Pension:

o Family pension received by the legal heirs of a deceased employee is taxable under the head “Income from Other Sources” and is eligible for a deduction of ₹15,000 or 1/3rd of the family pension, whichever is lower.