Tax Treatment of Family Pension Payments Received by Legal Heirs of a Deceased Employee

Here’s a detailed analysis of the tax treatment of family pension payments received by legal heirs of a deceased employee under the Income Tax Act, 1961:

1. Taxability of Family Pension

• Classification: Taxed under “Income from Other Sources”[Section 56(2)].
• Recipient: Legal heirs (spouse, children, dependent parents) of the deceased employee.
• Tax Basis: Pension amount is fully taxable but eligible for a standard deduction.

2. Standard Deduction Rules

Under Section 57(iia), the taxable amount is reduced by:

• Lower of:
  • ₹15,000(₹25,000 from FY 2024-25) or
  • 1/3rd of the total pension received.

Example:

• Annual pension: ₹1,00,000
• Deduction: ₹25,000 (lower of ₹33,333 or ₹25,000)
• Taxable amount: ₹75,000 .

3. Key Features

• No TDS: Generally, no tax is deducted at source (TDS) on family pension .
• Reporting: Declare in ITR-1 or ITR-2under “Income from Other Sources”.
• Exemptions:
  • Armed forces pensions: Fully exempt for family members.
  • UNO pensions: Exempt for employees’ families.

4. Compliance Requirements

• Documents Needed: Death certificate, pension payment order (PPO), and KYC for bank processing.
• Senior Citizens: Those aged 75+ with only pension/interest income may avoid filing ITR if TDS is correctly deducted by their bank [Section 194P].

5. Comparison with Regular Pension

6. Practical Tips

• Claim Deductions: Ensure the standard deduction is applied in ITR.
• Documentation: Maintain pension slips and bank statements for verification.
• Tax Planning: Senior citizens can use Section 80TTB(₹50,000 exemption on interest income) to reduce tax liability