How your Annuity and pension are taxed
All Government employees and those working with government departments, generally, get pensions after their retirement. Even people in organised sector who have contributed towards Employee Provident Fund (EPF) are also entitled to receive pension under Employee Pension Scheme (EPS), 1995. Not only the employees but also the family members of such employees get pension after death of the employee in both the situations.
In order to help their employees get pension after their retirement, some of the employers also contribute towards superannuation fund. All the government employees have been shifted to New Pension System(NPS) after 1^st January 2004, where the quantum of pension which an employee would receive would depend on the amount contributed by them along with the employer to NPS instead of they being entitled to a fixed amount as pension. Likewise even self employed individuals can also contribute towards NPS to accumulate fund for retirement part of which is used for buying an annuity from an insurance company.
The words pension and annuity, generally, are used interchangeably but strictly speaking the monthly amount received by an employee after retirement from his ex-employer or in connection with his employment is pension and the periodical payment which a person receives from an insurance company is annuity. The income tax laws have different rules in respect of taxation of annuity and pensions. Let us discuss the law.

Pension from ex-Employer:

The pension received from an ex employer is treated as salary and is fully taxable. Salaried and pensioners both can claim standard deduction upto forty thousand rupees from current year.
You can commute certain portion of your pension to receive the present value of such commuted value of pension as lump sum at the time of retirement. All the government employees as well as those working in government companies are entitled to claim entire value of commuted pension as exempt. However other employees are entitled to claim only 1/3 of pension of the pension as exempt, in case the employee gets gratuity as well at the time of retirement. In case you are not entitled to get any gratuity, you can commute upto 50% of the pension as exempt.

Pension under superannuation policy or employee pension scheme:

In case your employer has contributed towards superannuation fund or has purchased superannuation policy for you, you are entitled to receive pension after your retirement. Such pension is fully taxable under the head Salary as it is received because of your employment. Likewise for pension received directly from your employer as well for the pension received under superannuation from an insurance Company, you are entitled to claim standard deduction as discussed above. You can commute 1/3 of the annuity under superannuation which would be tax free in your hands.
The pension received under EPS, for contributions made by you towards EPF, is fully taxable in under the head salaried and entitles you to claim standard deduction.

Family pension:

After death of an employee the dependent family members of the deceased are entitled to receive pension which is called family pension and is fully taxable in the hands of recipient/s. Since the pension is not received due to services rendered by the recipient it is not taxable under the head the head Salaries but under Income From Other Source.
In respect of family pension the dependent is entitled to claim a deduction equal to 1/3 of the pension amount subject to a maximum of fifteen thousand rupees during a year against the deduction of forty thousand rupees available to retired employees against the pension.

Tax on Annuity from insurance company:

In case you have bought an annuity plan from an insurance company, under which you will get an agreed amount at the agreed interval which is annuity. The amount of such annuity is fully taxable under the head income from other Sources. Since this amount does not have any co-relation with any employment, the deduction of standard deduction, however is not available against this amount.

Annuity under NPS account:

The salaried who have opted for NPS instead of EPF account have to mandatorily buy an annuity plan from an Indian insurance company for 40% of the accumulated corpus for which they will get annuity from the insurance company. Logically speaking such annuity should be taxable under the head Salaries but as the employee can continue to contribute to his NPS account even after he resigns or even when he turns self employed, it is doubtful whether the annuity received, in such situation, will become taxable under the head Salaries or it should be taxable under the head Income From other Sources. Likewise self employed taxpayers can also contribute towards the NPS to receive pension. Presently the income tax law does not have any specific provision as to under which head of income tax the annuity should be taxed. In my opinion for salaried the pension should be taxable under the head Salaries and it should be entitled for standard deduction. However as the law is silent on this aspect it is risky to offer it under the head Salaries for claiming standard deduction. Since salaried and self employed themselves can contribute fifty thousand rupees, additionally, under Section 80 CCD(1B), the head under which the pension received should be taxed and whether one will be entitled to claim standard deduction is a grey area and a proper amendment of the law would clear the smog around the annuity under NPS.
The writer is tax and investment expert and can be reached at [email protected] and @jainbalwant
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