Retirement Benefits: Tax implications on pension income

Updated: Wednesday, May 15, 2013, 9:50 [IST]

The life of a person steps towards a great uncertainty after retirement. At this stage, people tend to become reliant on the savings and investments made during the time of regular employment. Since the cash flows are generally low compared to the earning during employment, people want full retirement money in hand without any deductions.

One of the important factors that can reduce the retirement corpus is the tax implication on such receivables. Income - Tax Act, 1961 has already provided relaxation by increasing tax slabs for senior citizens. The tax slab now starts from Rs.2,50,000. Here, senior citizen means an individual who is 60 years of age or more and an individual comes under the category of very senior citizen when his/her age is 80 years or more. In addition to the deduction available in slabs, a retired person can do proper investment planning to reduce his tax liability.

Sources of income after retirement and respective tax implications:-

Pension Receivables

Pension is the most common source of income after retirement. It refers to the retirement plan or superannuation which may be set up by government, employers, insurance companies, employer association and trade union, etc.

Pension is generally received on a periodic basis i.e. monthly, quarterly, etc. This type of receivable is called commuted pension, and a non-commuted pension is received by an individual in the form of a lump sum amount.

A non-commuted pension is fully taxable in the hands of all categories of employees, however some exemptions are available for a commuted pension receiver.

Tax implications on commuted pension:

It is tax free in the hands of government servants, whereas in the case of other employees:-

Situation1- where an individual also receives a gratuity along with pension, then one-third of his pension is exempt from tax.

Situation 2- where an individual does not receive a gratuity along with pension, then half of his pension is exempt from tax.

Pension received by spouse upon death of a senior citizen is eligible for deduction up to Rs.15, 000 or one-third of the receivable, whichever is less.

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