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A pension is a recurring payment made to a person in exchange for services delivered during their working years. The compensation is taxed as part of the employee's income tax assessment under the heading ''Salaries' in your income tax return. The applicability of income tax on pensions in India is discussed in this article.
When you receive a pension from your job, that sum becomes your pay once you retire, and it is consequently taxable under the Income Tax Act of 1961.
So, if you are wondering – 'Is pension taxable?' and if it is going to affect your retirement planning, keep reading!
Commuted & Uncommuted Pension
Income tax would apply to any money received as a pension from the employer, the pension fund, or any other source as a pension.
Before delving into the regulations for income tax for senior citizens pensioners, it is vital to note that there are two sorts of pensions:-
1. Uncommuted Pension: An uncommuted pension is one that is received on a regular basis. Whether it is a government or non-government employee, any money received as Uncommuted Pension is entirely taxable.
2. Commuted Pension: Commuted refers to the process of changing jobs. By relinquishing a component of the pension, many firms allow the employee to receive a lump-sum payment in exchange for a piece of the pension. Commuted pension refers to the money received in this way. The pension might be commuted in whole or in part.
How Does Commuted & Uncommuted Pension Get Taxed?
Here are some things you need to know about the taxation of commuted and uncommuted pensions to know the answer to ‘Is Pension Taxable?’:
- Uncommuted pensions, as well as any other periodic pension payments, are fully taxable as salary.
- In some cases, a commutated or lump-sum pension may be exempt.
- A commuted pension is totally exempt for a government employee andpartially exempt for non-government employees.
- If a pension is combined with a gratuity, 1/3 of the amount of the pension that would have been received if the entire pension had been converted is exempt from commuted pension taxation, while the remainder is taxed as pay.
- If only the pension is obtained and no gratuity is paid, 12%of the pension that would have been received if the pension was transferred in its entirety is exempt.
Under the Income Tax Act of 1961, the uncommuted pension is treated as a salary and is consequently taxable. Section 89(1), on the other hand, imposes a series of deductions on salary income received by pensioners from nationalised banks. When TDS is applied, banks make tax rebate adjustments under Section 88 and 88B.
- In some cases, a commutated or lump-sum pension may be exempt.
- A commuted pension is totally exempt for a government employee andpartially exempt for non-government employees.
- If a pension is combined with a gratuity, 1/3 of the amount of the pension that would have been received if the entire pension had been converted is exempt from commuted pension taxation, while the remainder is taxed as pay.
- If only the pension is obtained and no gratuity is paid, 12%of the pension that would have been received if the pension was transferred in its entirety is exempt.
Under the Income Tax Act of 1961, the uncommuted pension is treated as a salary and is consequently taxable. Section 89(1), on the other hand, imposes a series of deductions on salary income received by pensioners from nationalised banks. When TDS is applied, banks make tax rebate adjustments under Section 88 and 88B.
Individual income tax forms are available from the Indian government in four different formats. ITR 1 and ITR 2 are the two forms that apply to retirees out of these four. This should answer your question – ‘Is pension taxable?’
Income Tax For Senior Citizens Pensioners(Above age 60 but less than 80 years)
Here are the rates for income tax for senior citizens pensioners:
- For receiving annual pension within the range of Rs.3 lakhs – Nil
- For receiving annual pension ranging between Rs.3 lakhs and Rs.5 lakhs – 10%
- For receiving annual pension ranging between Rs.5 lakhs and Rs.10 lakhs – 20%
- For receiving annual pension above Rs.10 lakhs – 30%
Change in Income Tax Return Rule in 2021
Finance Minister Nirmala Sitharaman declared in the Union Budget 2021 that retired citizens above the age of 75 will be exempt from filing income tax returns for the fiscal years 2021-2022. This law applies to older persons over the age of 75 whose only source of income is a pension.
It’s also worth noting that seniors over 75 are not exempt from paying taxes but only from filing an income tax return (ITR) if they meet specific requirements. Another point to remember is that senior folks will only be excused from submitting income tax returns if the interest income is generated by the same bank from which the pension is drawn.
The rules for income tax for senior citizens pensioners states that senior persons who meet the following conditions will be eligible for an ITR exemption:
- If they are an Indian resident.
- They must have a bank account with one of the government's designated banks.
- Pensions are the only source of income for senior citizens. They should be able to earn interest from the same bank that pays their pension. In summary, an elderly individual should only have one bank account for receiving pension payments.
- A declaration must be written to the selected bank by the pensioner. All pertinent information should be included in this declaration.
The rules for income tax for senior citizens pensioners states that senior persons who meet the following conditions will be eligible for an ITR exemption:
- If they are an Indian resident.
- They must have a bank account with one of the government's designated banks.
- Pensions are the only source of income for senior citizens. They should be able to earn interest from the same bank that pays their pension. In summary, an elderly individual should only have one bank account for receiving pension payments.
- A declaration must be written to the selected bank by the pensioner. All pertinent information should be included in this declaration.
Benefits of Pension Plans
Pension and retirement plans come with various benefits that can give protection to your family and provide you with retirement savings. Here are the key benefits of pension plans:-
1. Guaranteed Income
Pension plans can help you receive a guaranteed regular income after retirement and ensure you a financially independent life. You can use a retirement calculator to estimate your requirements after retirement.
2. Death Benefit
The death benefit is also provided under pension plans to financially secure your family in your absence. A lump sum amount is given to the nominee in case of your unfortunate demise.
3. Flexibility in Payment of Premiums
You have the flexibility to choose your premium payment term as per your financial goals and requirements.
4. Riders
With riders, you can enhance the coverage of your pension plan. It can help you provide additional coverage to yourself and your family.
5. Tax Benefits 4
The answer to the question – ‘Is pension taxable?’ is Yes. But pension plans also affer tax benefits as they qualify for tax deductions under section 80CCC of the Income Tax Act, 1961. Tax deductions up to Rs. 1.5 lakh can be availed on the purchase of a new policy or on the payments made towards the renewal of the existing policy.
4Tax benefits as per prevailing tax laws, subject to change.
Max Life Pension Plans
Here are some of the Max Life Pension Plans: -
1. Guaranteed Lifetime Income Plans (GLIP)
GLIP is an annuity plan that ensures regular income to help you meet your financial objectives. You only need to make a single premium payment. And based on the annuity rates at the time, you can start receiving your annuity immediately or after some time, depending on whether you choose the immediate or the deferred annuity variant.
You can also include your partner in this plan, so they can continue receiving the annuity even when you are not around. The death benefit can also be included in this plan, which is given as a lump sum to the nominee after the last survivor (annuitant) passes away. Also, the death benefit is at least 105% of the purchase in the case of the deferred annuity variant.
2. Forever Young Pension Plans (FYPP)
FYPP is a unit-linked pension plan that provides market-linked growths to help you build an adequate corpus. The premium can be paid regularly or in one lump sum at the start of the policy.
The maturity value under this plan depends on your chosen investment. In the case of Pension Preserver Fund, the higher of the fund value or 110% of the total premium paid is payable. Under the Pension Maximiser Fund, the higher of 101% of the total premiums paid or the fund value is payable on maturity.
3. Max Life Saral Pension Plan
Max Life Saral Pension is a Non Linked, Non Participating single premium individual immediate annuity plan that can ensure you a steady income after your retirement. Under this plan, you have the option to choose between Single Life annuity and Joint Life annuity. The death benefit is payable to the nominee in the case of demise of the annuitant and the policy is terminated. It also gives you the option to receive your annuity payout monthly, quarterly, half-yearly, or yearly.
Frequently Asked Questions (FAQs)
1. What is the standard deduction for senior citizens?
The standard deduction for older citizens is now Rs. 50,000, after the recent amendments in the Income Tax Act.
2. Do I need to pay income tax if my annual income is below 3 lakhs?
A senior person can earn up to 3 lakh in tax-free income, while super senior citizens above the age of 80 can earn up to 5 lakh in tax-free income.
3. Do I need to file an income tax return on my pension?
If your yearly pension income exceeds Rs 2.5 lakh, you must file a return. The maximum for senior persons is Rs 3 lakh if they are 60 or older. The upper limit for extremely senior folks is Rs 5 lakh if they are 80 years old or above.
4. What is the taxation rule for pension for family members?
Pensions are available to the employee's spouse, children (under the age of 25), and unmarried daughter, as previously stated. Pensions received by such family members will be taxed as "other forms of income." A standard deduction of 33.33 percent of the pension or Rs 15,000, whichever is less, will be granted to the beneficiary.
5. Who can get pension?
After completing a period of service, an employee may be eligible for a pension. The pension can also be received by the employee's spouse, children younger than 25 years old, and an unmarried daughter, in some cases.
6. How is pension income taxed?
Is pension taxable? – Yes. The pension income is taxed just like the way income from salary is taxed. However, the pension is fully exempt from tax if it is received from a government employer.
7. Is Form 16 applicable on pension income taxable as salary?
Yes, you will receive Form 16 from the employer or the bank making the remittance.
8. Is there a need to file an income tax return on pension income?
You need to file an income tax return if your annual income is more than Rs. 2.5 lakh. The limit is Rs. 3 lakh for the senior citizens of the age 60 or above. And in the case of senior citizens of age 80 years or above, the limit is Rs. 5 lakh.
Source:
https://www.incometaxindia.gov.in/Pages/senior-citizen.aspx
https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-2
https://economictimes.indiatimes.com/wealth/tax/senior-citizens-aged-75-and-above-are-not-exempted-from-itr-filing-this-year/articleshow/85951232.cms?from=mdr
https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-2
https://economictimes.indiatimes.com/wealth/tax/senior-citizens-aged-75-and-above-are-not-exempted-from-itr-filing-this-year/articleshow/85951232.cms?from=mdr
https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-2
ARN No: Feb22/Bg/17
