Income Tax Rules for Pensioners

What is Pension?

According to Section 60 of the Centralized Processing Centre (CPC) and Section 11 of Pension Act pension can be described as a stipend or an allowance for the service for any service rendered to an organization. The pension is the compensation offered for the past service rendered in anemployer-employee relationship.

The pension is based on the previous agreement of service which endsonly after the death of the employee. The pension amount that is received from the previous employer is taxed under the head of Salary, and thus there are deductions on the salary income as applicable under the Section 89(1). The pension is disbursed to the pensioners through a nationalized bank. The adjustment on tax rebate as applicable under Section 88 and 88B is done by the bank during the tax deduction at source from the pension.

Income Tax Form for Pensioners

The government has notified four Income Tax Return Forms as applicable to Hindu Undivided Family Individual (HUF) which are enlisted below

Form No. ITR 1: This form is also known as Sahaj Form which means easy. This form can be filling by the assessee as an individual. This form can only be used by individuals who are salaried, have a regular source of income and not a business enterprise.

Form no. ITR 1: This form can be used by pensioners to file their income tax returns. Most of the salaried individuals who have a taxable income including their pension and own a house use this form for paying their taxes.

How to Calculate Income Tax for Pensioners?

The pension is taxed as taxed as your salary income in that pension amount is taxed as Salary as mentioned in your Income Tax Return Form. The pension is paid on a monthly basis, however one can also opt to receive apension as a lump sum in form of commuted pension. Pension paid on periodical basis is known as Uncommuted Pension and uncommuted pension can be taxed fully as salary.

In certain cases the commuted pension can be exempted from Tax. For example: Pension received by any of your family member (under the head of “income from other sources) If the income is in form of lump sum payment. In case of uncommuted pension that is received by any of the family members an exemption of Rs. 15000/- or 1/3rd of the pension amount (whichever is less) is applicable.

Any pension that is received from United Nations Organization under the Section 2 of the United Nation Privilege and Immunities Act – 1947 is exempted from tax as that pension is received by the child of the Armed Force professionals.

Section 57 describes family pension as a monthly amount that is paid to a person belonging to the family of an employee by the employer in case of unfortunate demise of the employee. Given that there is no employer-employee relationship in the scenario, the family pension is taxed as “Income from Other Sources”.

How Much Tax do I Pay on My Pension?

In cases where the taxable income of the individuals is more than the exemption limit then she or he has to file the income tax return. Pension income received from an employer is taxed as a salary income whereas the interest on various investments is taxed as “income from other sources”. The interest income is exempted from tax when it comes to public provident fund (PPF). If the pensioner’s taxable income (Taxable Income being the pension in addition to the taxable interest minus the investments such as public provident fund, health premium, etc. which is eligible for the deduction) is above the exemption limit in the assessment year, you will have to file your Income Tax Return.

The commuted pension in case of central government, state government or defense services employees (central /state Acts) is exempted from tax while it is partially exempted for non-government employees. If the non-government employees receive gratuity along with the pension, 1/3rd of the pension is exempted while the remaining amount is taxable as Salary provided 100% is commuted.

TDS Pensioners

If the pensioner receives pension via nationalized bank the TDS provisions are applicable as in case of salary income. The banks are allowed to do deductions as per Chapter VI A. Banks also grant relief under Section 89(1) for any pension arrears. It should be noted that TDC is not deducted from family pension as the family pension does not come under the Section 192 of the Income Tax Act.