Income Tax Treatment of Pension: Know Types of Pensions and their Tax Exemptions:

Income Tax Treatment of Pension: Know Types of Pensions and their Tax Exemptions

Retirement benefits play a crucial role in providing financial security to employees in their post- retirement years. In India, employers provide various retirement benefits to employees. The most common retirement benefits offered by employers in India include the Employee Provident Fund (EPF) and the National Pension System (NPS), both of which are savings schemes that allow employees to accumulate a portion of their salary, along with a matching contribution from their employer. Additionally, employees are entitled to receive gratuity, a lump sum payment made as a token of appreciation for their service, and leave encashment on their retirement. If an employee is eligible for a pension, he may also receive the commuted pension. If an employee is voluntarily retired or retrenched, he may be entitled to voluntary retirement compensation or retrenchment compensation It is a known fact that Pension is a payment given by an employer to its employee after the service period of the employee is over as a reward for past services. Pros of Pension Getting pension after retirement comes with some key advantages such as:

• Financial Safeguard in Retirement: Pension comes with a predictable income after retirement, ensuring that living expenses are covered without relying entirely upon savings.
• Contribution of Employer: Usually, employers also contribute to pension funds, this helps in building retirement savings in a speedy manner.
• Tax Benefits: In many cases, pension contributions are tax-deductible, some pension scheme are also exempted from taxation.
• Security for the Future: Having a well-funded pension plan ensures that a person can live peacefully after retirement with an undisrupted source of income.

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Types of Pension

Pension has two different types: Commuted Pension – The employee receives a part of the pension as a lump sum amount while surrendering to a reduced payment of monthly pension. Uncommuted Pension – The employee receives the pension payment on a regular basis, usually every month, instead of receiving a lump sum amount.

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Tax Treatment: Pension

The tax treatment of pension:

Particulars	Taxability
Uncommuted Pension	Fully Taxable. Though, disability pension payable to disabled armed forces personnel stands exempted from tax
Family Pension	33.33% of Family Pension subject to a maximum of Rs. 15,000 shall be exempt from tax. However, the family pension received by the family members of the armed forces shall be fully exempt from tax.
Commuted pension received by an employee of the Central Government, State Government, Local Authority, and Statutory Corporation	Fully Exempt
Commuted pension received by other employees who also receive gratuity	1/3 of the full value of commuted pension will be exempt from tax
Commuted pension received by other employees who do not receive any gratuity	1/2 of the full value of commuted pension will be exempt from tax