Income Tax on Pension

Pensions are a crucial source of financial security for retirees, but understanding how they are taxed in India is vital for effective financial planning. The tax treatment of pensions depends on whether the pension is commuted or uncommuted. While commuted pensions may enjoy tax exemptions, uncommuted pensions are fully taxable. With proper planning, you can minimise your tax liability and make the most of your retirement income.

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A pension can be received in two forms—commuted or uncommuted. 

• A commuted pension refers to a lump sum amount received at the time of retirement, which is a part of your total pension. 
• On the other hand, an uncommuted pension is the regular monthly payment you receive post-retirement.

Commuting a portion of your pension can help reduce your immediate tax burden, as commuted pensions are either fully or partially exempt from tax. However, the uncommuted portion remains taxable as per your income slab.

The tax implications for commuted and uncommuted pensions differ significantly. Here is a breakdown:

Commuted Pension

• Government Employees: Fully exempt from tax.
• Non-Government Employees:
  • If gratuity is received: One-third of the commuted pension is exempt from tax.
  • If gratuity is not received: Half of the commuted pension is exempt from tax.

Uncommuted Pension

• Fully taxable for all employees and industries under the head "Income from Salaries."

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Reporting pension income in your Income Tax Return (ITR) is straightforward. Follow these steps:

1. Select the correct ITR form: Most pensioners use ITR-1 or ITR-2.
2. Declare uncommuted pension: Report it under "Income from Salaries."
3. Declare commuted pension: Mention the exempt portion under "Section 10(10A) - Commuted value of pension received."
4. Claim applicable exemptions: Use deductions such as the standard deduction of Rs. 50,000.
5. Include other income: Add interest or other income sources while filing.

If a family member receives a pension after the demise of the pensioner, it is treated as a family pension. The taxation rules for family pensions differ from regular pensions:

• Tax Treatment: Family pensions are taxable under "Income from Other Sources."
• Exemptions:
  • Deduction of one-third of the family pension amount or Rs. 15,000, whichever is lower.
  • For FY 2024-25, the deduction limit has increased to Rs. 25,000 under the new tax regime.

Family members should declare this income in their ITR forms and claim the applicable deductions. 

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The tax liability for pensioners is calculated based on the applicable income tax slab. Here are the slabs under the old tax regime:

The new tax regime, introduced in FY 2020-21, offers simplified slabs but does not allow most deductions. 

New income tax slab rates for FY 2025-26 (AY 2026-27) after the budget 2025
 

Budget 2025 has introduced new income tax slabs, bringing tax relief to many taxpayers. Under the proposed income tax slabs under the new tax regime for FY 2025-26 (AY 2026-27), incomes up to Rs. 4 lakh are now exempt from tax. These income tax slabs for FY 2025-26 (AY 2026-27) aim to simplify tax compliance while ensuring lower rates. The new regime remains the default option, encouraging wider adoption among taxpayers.

You can choose between the old and new tax regimes based on your income and deductions. 

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Understanding the tax implications of pensions is essential for effective financial planning. While commuted pensions offer tax exemptions, uncommuted pensions are fully taxable. Family pensions also come with specific exemptions that can reduce the tax burden. By planning ahead and using available deductions, you can optimise your tax liability.

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