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Income tax guide on pension: How to file pension income in ITR?
March, 27th 2023

Pension income is considered "Salary Income" and is taxed at the taxpayer's appropriate slab rates. Pension income is taxable for senior citizens and super senior citizens depending on whether it is received from a former employer or from the government. If you get a pension from a former employer, it is taxed as "Income from Salary." If you get a government pension, it is taxed under the category "Income from Other Sources." Here's how senior citizens and super senior citizens can declare pension income in ITR, based on an exclusive interview with several industry experts. 

CA Arpit Jain, Joint MD, Arihant Capital

If you receive retirement benefits in the form of a pension the amount received will be taxable and must be included in your income tax return (ITR). Just like other incomes accrued in India, the pension income is also taxed according to the Income Tax slabs fixed by the Government of India.

Tax treatment of different types of pension income  

Government pension: Pension received from the central or state government is fully taxable under the head "Salary" in ITR.

Family pension: Family pension is received by the legal heirs of a deceased person who was receiving a pension. It is taxable under the head "Income from other sources" in ITR. The tax liability of family pension is based on the income tax slab rate applicable to the recipient.

Private sector pension: Pension received from private companies is also taxable and must be included in ITR under the head "Income from salary." The employer will deduct TDS on the pension income, and the taxpayer must reconcile the TDS and file their ITR accordingly.

The pensioners may also opt for commuted pension, which is receiving a lump sum pension amount once every year, or they can receive it monthly (uncommuted).

1. Uncommuted pensions are fully taxable as salary.

2. A commuted pension of a government employee is completely exempt from tax and

3. A commuted pension for non-government employees is partially exempt depending on whether the gratuity is received or not:

a.  If gratuity is also received with a pension – 1/3rd of the amount of pension that would have been received if 100% of the pension was commuted, is exempt from commuted pension and the remaining is taxed as salary.

b.  And in case only pension is received and gratuity is not received – ½ of the amount of pension that would have been received, if 100% of the pension was commuted, is exempt.

 

How to reduce tax liability on your pension income?

Just like a regular taxpayer, pensioners can also reduce their tax burden through one of the following ways:

Availing deduction under Section 80C – Under the Section 80C of ITA, you are eligible for a deduction of 1,50,000 every year if you invest this amount in one of the qualified investment products that include equity-linked savings schemes (ELSS also known as tax saving mutual funds), Citizens Saving Scheme, Public Provident Funds, Government Bonds, National Savings Certificate, or qualified fixed deposits.

Deduction under 80 DDB - This allows a deduction of up to ₹1,00,000 if a dependent is suffering from a specific disease (cancer, AIDS, neurological disability etc.). The dependents allowed under this deduction can be your child, spouse, sibling or parent.

Deduction using Section 80 TTB - Senior and super senior citizens of 60yrs and above can claim tax deductions under Section 80TTB of up to 50,000. This deduction can be claimed on interest income earned on deposits held with a bank, post office, or a cooperative society.

Deduction under Section 80 D - this allows a deduction of up to 50,000 in a year on the premium paid on the senior citizen's health insurance plan.

 

Filing your pension income in ITR

Here’s how you can file tax on your pension income:

1. Determine the type of pension income received and its taxability.

2. Obtain Form 16 or Form 16A, which will contain the details of the TDS deducted on your pension income.

3. Calculate the total taxable pension income and add it to your income.. Apply the appropriate income tax slab rates to calculate your tax liability.

5. Use Form 26AS to reconcile your TDS with the tax payable.

6. Fill in the details in the relevant section of the ITR form (ITR 1 or ITR 2) and file your return by the due date.

 

Amar Ranu, Head - investment products & Advisory, Anand Rathi Shares & Stock Brokers

Pension or retirement plans offer the dual benefit of investment and insurance cover. By investing a certain amount regularly towards your pension plan, you will accumulate a considerable sum in a phase-by-phase manner. This will ensure a steady flow of funds once you retire.

There are two types of pension – commutated and uncommuted.

When the employees retire, they have the option to receive a monthly pension or receive a certain amount as a lump sum payment in advance. This advance lump sum payment of pension is known as a commuted pension. The monthly pension that one receives from the annuity fund is uncommuted pension. 

Uncommuted pension or any periodical payment of pension is fully taxable as salary. 

Commuted or lump sum pension received may be exempt in some instances:

1) For a government employee, commuted pension is fully exempt.

2) For a non-government employee, it is partially exempt:

If gratuity is also received with a pension – 1/3rd of the amount of pension that would have been received, if 100% of the pension was commuted, is exempt from commuted pension and the remaining is taxed as salary.

And in case only pension is received and gratuity is not received –1/2 of the amount of pension that would have been received, if 100% of the pension was commuted, is exempt.

Recent update: It has been proposed to exempt senior citizens from filing income tax returns if pension income and interest income are their only annual income source. Section 194P has been newly inserted to enforce the banks to deduct tax on senior citizens more than 75 years of age who have a pension and interest income from the bank.

How to file?

After providing all these details accurately as per Form 16 process(highlighted above), a pensioner will need to go to the income tax department's official website and begin the e-filing procedure. After the e-filing is done, they will receive or will need to download the ITR V, which they will need to send to the CPC within 120 days.

If pensioners are having trouble following the online process, they can also file their taxes offline. They can easily do that by visiting their bank branch and asking for challan 280. Then, fill out the form received. This form has an identical format to the one online.

 

Babita Rani, Tax consultant

Atpresent, the employee provident fund, or EPF, receives 12% of the employee's base pay, dearness allowance, and retention allowance, if applicable. The full employee contribution goes to the EPF, while the employer's 12% contribution is divided into 3.67% for the EPF and 8.33% for the EPS. Employees do not make contributions to the pension plan; instead, the Government of India makes a 1.16 percent contribution to each employee's pension. Until May 3, 2023, the Employees Provident Fund Organization (EPFO) has permitted some qualified members to seek for higher pensions under the EPS.

People receiving pension benefits: In the case of ITR 2, the employee must provide the name, address, and tax deduction and collection account number (TAN) of the employer, LIC, or any other fund where the individual gets pension income from the fund to which the employer makes contributions (mandatory only if tax is deducted on pension). Those in the family who get a pension Family members who get pensions must reveal them under "Any other income" in the schedule of other sources in ITR 2's schedule of other sources. The user must select "Family pension" from the drop-down menu under "Other Sources" for ITR 1.

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