Income Tax on commutation of pension

 Income Tax Treatment on commutation of pension

Commuted pension is a lump sum payment in lieu of periodical payment. For instance after his retirement, X gets 25 percent of his pension commuted for Rs. 60,000/- (after commutation he will get the remaining 75% i.e. Rs. 1,500/- by way of monthly pension).

In this case, Rs. 60,000/- is commuted pension which X has received in lieu of 25% of his monthly pension.

The taxability of the commuted pension is dependent upon the status of the employee and whether or not such employee has received gratuity.

Commuted pension is received by a government employee

If such commuted pension is received by a government employee (i.e. employee of the Central Government, State Government, Local Authority and Statutory Corporation) who may or may not have received gratuity, then such commuted pension would be completely exempt from tax.

Commuted pension is received by a non-government employee

Non-government employee Received Gratuity

If such commuted pension is received by a non-government employee who has received gratuity, then only one-third of the pension which he is normally entitled to receive, would be exempt from tax.

Non-government employee does not Receive Gratuity

If the same commuted pension is received by a non-government employee who has not received gratuity, then only one-half of the pension which he is normally entitled to receive is exempt from tax.

Commuted pension Received from Insurance Fund

Any payment in commutation of pension received from a fund set up by Life Insurance Corporation of India on or after the 1st day of August, 1996 or any other insurer under a pension scheme approved by IRDAI is also exempt from Income tax

If the payment in commutation of pension received by an employee exceeds the aforesaid limits, such excess pension received is liable to tax in the assessment year relevant to the previous year in which it is due or paid.

The assessee can however, claim relief under section 89.

Relevant Section 10(10A) of Income Tax Act

Incomes not included in total income.

10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

…..

(10A) (i) any payment in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the defence services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or a corporation established by a Central, State or Provincial Act ;

(ii) any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed—

(a)		in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and
(b)		in any other case, the commuted value of one-half of such pension,

such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality ;

(iii) any payment in commutation of pension received from a fund under clause (23AAB) ;]

Relevant Section 10(23AAB) of Income Tax Act

Incomes not included in total income.

10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

…..

[(23AAB) any income of a fund, by whatever name called, set up by the Life Insurance Corporation of India on or after the 1st day of August, 1996 or any other insurer under a pension scheme,—

(i)		to which contribution is made by any person for the purpose of receiving pension from such fund;
(ii)		which is approved by the Controller of Insurance or the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), as the case may be].

Explanation.—For the purposes of this clause, the expression “Controller of Insurance” shall have the meaning assigned to it in clause (5B) of section 2 of the Insurance Act, 1938 (4 of 1938) ;]

 

 

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