Taxability of Pension
Introduction
Pension income is taxable under “Salaries.” While an uncommuted pension (paid periodically) is fully taxable, a commuted pension (lump sum) enjoys exemptions under specific conditions.
Taxability of Pension
- Uncommuted Pension:
- Monthly pensions are taxable as “Salary.”
- Family pensions are taxable as “Income from Other Sources,” with a deduction of the lower of 15,000 (Rs. 25,000 if not opted out of default tax regime under Section 115BAC) or 1/3rd of the pension.
- Commuted Pension:
- Government Employees: Fully exempt
- Non-Government Employees:
- If gratuity is received: 1/3rd of commuted value is exempt.
- If gratuity is not received: 50% of commuted value is exempt.
- Family Members: Exempt if received by heirs upon the employee’s death.
Exemptions for Specific Pensions
- Gallantry Award Recipients:
- Pension for Param Vir Chakra, Maha Vir Chakra, Vir Chakra or any other gallantry award notified by the Government. The exemption has also been extended for the family pension received by any family member of armed personnel.
- Disability Pension for Armed Forces:
- Fully exempt if disability is attributable to service. [Press Release, Dated 20-12-2007]
- Family Pension for Defence Personnel:
- Exempt if death occurred in operational duties.
National Pension System (NPS)
- Contributions:
- Employee’s Contribution: Deduction up to 10% of salary under Section 80CCD(1), plus 50,000 under Section 80CCD(1B).
- Employer’s Contribution: Deduction for employees:
- Central/State Govt.: 14% of salary.
- Others: 10% or 14% (if employee is chargeable to tax under the default tax regime of Section 115BAC)
- Self-Employed: Deduction up to 20% of gross income plus 50,000 under Section 80CCD(1B).
- NPS Vatsalya: Additional 50,000 under Section 80CCD(1B) to parent or guardian of minor.
- Unified Pension Scheme (UPS):Deductions are allowed for employer’s contribution up to 10% under Section 80CCD(2), employee’s contribution up to 10% under Section 80CCD(1), and an additional 50,000 under Section 80CCD(1B).
- Withdrawals:
- Partial Withdrawal [Section 10(12B)]: Exempt for employees up to 25% of their contribution.
- Final Withdrawal [Section 10(12A)]: 60% of the corpus is exempt on closure/exit.
- Nominee’s Receipt: Fully exempt if credited after the subscriber’s death.
- NPS Vatsalya: Partial withdrawal shall be exempt to the extent of 25% of amount of contributions made by the parent or guardian of a minor.
- UPS [Section 10(12AA)]: Payments from the NPS Trust to a UPS subscriber at superannuation, voluntary retirement, or retirement are tax-exempt up to 60% of the corpus.
- UPS [Section 10(12AB)]: Any lump sum received under clause (vi) of para 2 of Notification No. FX-1/3/2024-PR (24-01-2025) by a subscriber of the Unified Pension Scheme is exempt.
- Pension from NPS Funds:
- Taxable under “Income from Other Sources.”