Tax Treatment of Pension [Section 17(1)(ii)]

Pension is a periodic payment made to an employee after retirement. Under Section 17(1)(ii) of the Income Tax Act, 1961, pension is treated as “Salary Income” and taxed accordingly. The taxability depends on whether the pension is commuted (lump-sum) or uncommuted (periodic).

1. Types of Pension & Their Tax Treatment

2. Commuted Pension: Exemption Calculation

The exemption depends on whether the employee received gratuity or not:

A.  Government Employees

• Fully exemptfrom tax, whether commuted or uncommuted .

B.  Private Sector Employees

Example:

• An employee commutes 60% of pension(total value = ₹15 lakh) and received gratuity.
• Exempt amount= ⅓ × ₹15 lakh = ₹5 lakh
• Taxable amount= (60% of ₹15 lakh) – ₹5 lakh = ₹4 lakh

3. Key Points to Remember

1. Commuted vs. Uncommuted:
   • Commuted= One-time lump-sum payment (partially exempt).
   • Uncommuted= Regular pension (fully taxable).
2. Family Pension:
   • Received by spouse/children after employee’s death.
   • Taxable under “Income from Other Sources”with a deduction of ₹15,000 or ⅓ of pension (whichever is lower) .
3. Pension from Foreign Employers:
   • Taxable in India if the employee is a resident.
   • Double Taxation Avoidance Agreement (DTAA)may apply .
4. Pension Fund Investments (NPS, Superannuation):
   • NPS withdrawals(up to 60%) are tax-exempt, but annuity income is taxable .
   • Superannuation fundpensions are taxable as salary .

4. Reporting in ITR

• Uncommuted/Commuted Pension: Report under “Income from Salaries”.
• Family Pension: Report under “Income from Other Sources”.

5. Summary Table: Tax on Pension

Note:   Pensioners can claim Section 80TTB deduction (up to ₹50,000) on interest income from deposits if aged 60+.