Is pension income taxable?

A pension is a payment under which your employer provides regular income when you stop working after the age of 60. When you retire, you have an option to receive a pension in periodic instalments (usually monthly), or receive some lump sum initially and reduce your monthly income to that effect. These are called commuted and uncommuted pensions respectively.

For example, suppose your monthly pension is Rs 80,000 at the time of retirement and you wish to take a 10 per cent advance on your pension for the next 10 years. You will receive a lump sum of Rs 9.60 lakh (which is 10 per cent of Rs 80,000 x 12 months x 10 years). This is called a commuted pension. The rest of the amount, i.e., Rs 72,000 will be your monthly pension for the next 10 years. This is called an uncommuted pension. Of course, after the 10th year, you'll continue to receive your original Rs 80,000 per month pension.

The commuted pension amount is taxable depending on whether you're a government employee or not. If you're a government employee, it is completely exempt from tax. But if you're a non-government employee, the exemption is partial and depends on whether you receive gratuity or not:

• If you receive gratuity along with your pension, then 1/3rd of the amount of your pension is exempt from tax.
• If you don't receive any gratuity, then half of the amount of your pension is exempt from tax.

If the amount of commuted pension exceeds the aforesaid limits, such excess pension received is liable to tax.

The uncommuted pension or any periodical payment of pension is treated just like salary income and is fully taxable. That is, the monthly income you receive will be taxed according to the tax slab applicable to you irrespective of whether you're a government employee or a non-government employee. However, since this is considered a salary income, you can claim a standard deduction of Rs 50,000 to reduce your tax liability.

Suggested read: Is the contribution to LIC Pension Fund under NPS eligible for tax saving?

This article was originally published on August 03, 2022, and last updated on November 17, 2022.