How is pension income treated for computing tax?

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 How is pension income treated for computing tax?
Millions of retired folk in India, having retired from government services receive income from pension. Even dependent wives receive pension if the husband is no longer alive. It's important to note that pension is taxable. So, if you receive pension (not commuted, as explained below) it will be taxed either under the head "Salary" or "Income from other sources" depending upon the status of the receiver.

So, if you had been employed and receive a pension from your employee, you need to treat that pension under salary. But, if you receive family pension, say for example a wife receives pension after her husband's death it has to be treated as "income from other sources" and not under "salary" because the wife was not working, while her husband was.

Hence, it's important to make a proper classification and ensure that the pension income is shown under the appropriate head.

Family members who receive pension shall be exempted from Income Tax, if the family member was a recipient of the Param Vir Chakra, Mahavir Chakra or any such gallantry award.

It's important to note, any ex-gratia lump sum payment received by the widow of an employee who dies in service will not be taxable under the Income Tax Act.

Taxation on Commuted pension

A commuted pension is a type of pension in which the pensioner receives a lump sum payment in lieu of traditional pension payments. Commuted pensions pay the lump sum based on the length of employment and the age of the pensioner. Following are the tax implications on commuted pension.

1) Government Employees : Wholly exempt.

2) Non-Government Employees

a) Where the employee receives gratuity, amount not exceeding the commuted value to the extent of 1/3rd of the pension is exempt.

b) In other cases : the commuted value of ½ of pension is exempt.

Read more about: pension
Story first published: Thursday, April 25, 2013, 8:59 [IST]
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