PROSPERR.IO

Pension is a significant financial benefit for retired individuals, ensuring a steady income post-retirement. However, some retirees opt for a lump-sum payment in lieu of regular pension payments, known as the commutation of pension. Understanding the tax implications of this commuted pension is crucial for effective financial planning.

Section 10(10A) of the Income Tax Act, 1961, provides specific exemptions for the commuted value of a pension. The exemption for commuted value of pension provided under Section 10(10A) is available under both the tax regimes, i.e the Old Tax Regime and the New Tax Regime under Section 115BAC of the Income-tax Act.

This article explores these exemptions in detail, with relevant examples.

1. Commutation of Pension under Government Schemes

Exemption Clause:

Any payment in commutation of a pension received under the following is fully exempt from income tax:

• Civil Pensions (Commutation) Rules of the Central Government.
• Similar schemes are applicable to members of the civil services of the Union, defence services, civil posts under the Union, all-India services, civil services of a state, civil posts under a state, employees of a local authority, or a corporation established by a Central, State, or Provincial Act.

Example:

Mr. Akhilesh, a retired IRS officer, receives a lump-sum payment in commutation of his pension under the Civil Pensions (Commutation) Rules of the Central Government. This commuted pension is fully exempt from income tax.

2. Commutation of Pension under Other Employer Schemes

Exemption Clause:

For employees receiving commutation pensions from any other employer (i.e., private sector or organisations not covered under the aforementioned government schemes), the exemption is subject to certain limits:

• If the employee receives gratuity: the exemption is limited to the commuted value of one-third of the pension that the employee is normally entitled to receive.
• If the employee does not receive gratuity: the exemption is limited to the commuted value of one-half of the pension.
• The commuted value is determined based on factors such as the age of the recipient, state of health, rate of interest, and officially recognized tables of mortality.

3. Commutation of Pension received from pension Funds

Exemption Clause:

Any payment in commutation of pension received from a fund approved under clause (23AAB) of the Income Tax Act is fully exempt from income tax.

Clause (23AAB) refers to any fund set up by Life Insurance Corporation or any other insurer to which the contribution is made by any person for the purpose of receiving pension from such fund.

Conclusion

The Income Tax Act, 1961, provides significant exemptions for the commuted value of pensions, ensuring financial relief for retirees. Understanding these exemptions helps retirees plan their finances better and make informed decisions about opting for a lump-sum pension. Whether the commuted pension is received under government schemes, private sector employment, or approved pension funds, knowing the tax implications can help in effective financial management during retirement. Click here to book your FREE tax assessment call

Disclaimer: The article is only for educational purposes and is not to be construed as tax advice. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.