There are different situations in which pension is received by an employee. The tax treatment accordingly differs. When pension is received by an employee after retirement but during his lifetime, it is chargeable to tax. Employees are of two types, government and non-government. Even the pension can be of two types, commuted and uncommuted. Uncommuted pension is the periodical payment of pension. For instance, X gets monthly pension of Rs 2,000. It is taxable as salary under Section 15 in the hands of a government as well as a non-government employee.
Commuted pension is a lump sum payment in lieu of periodical payment. For instance, X gets 25% of his pension commuted for Rs 60,000 (after commutation he will get remaining 75%, i.e., Rs 1,500 by way of monthly pension). In this case, Rs 60,000 is commuted pension which X has received in lieu of 25% of his monthly pension. The taxability of the commuted pension depends on the status of the employee and whether such employee has received gratuity. If such commuted pension is received by a government employee (employee of Central/state government, local authority and statutory corporation) who may or may not have received gratuity, then such commuted pension would be completely exempt from tax. If such commuted pension is received by a non-government employee who has received gratuity, then one-third of the pension which he is normally entitled to receive, would be tax-exempt. If the commuted pension is received by a non-government employee who has not received gratuity, then one-half of the pension he is normally entitled to receive is exempt from tax.
If the payment as commutation of pension received by an employee exceeds the aforesaid limits, such excess pension received is liable to tax in the assessment year relevant to the previous year in which it is due or paid. The assessee can, however, claim relief under Section 89.
Pension from NPS
National Pension Scheme (NPS) is applicable to new entrants in government service or any other employer. As per the scheme, it is mandatory for persons entering the government service on or after January 1, 2004 to contribute 10% of their salary every month towards a notified pension account. A matching contribution is required to be made by the employer to the said account. The tax treatment under the new scheme is as follows:
1) Contribution by the employer to the notified pension scheme (NPS) is first included under the head ‘Salaries’ in the hands of the employee.
2) Such contribution is deductible to the extent of 10% of the salary of the employee under Section 80 CCD(2)
3) Employee’s contribution to NPS to the extent of 10% of salary is also deductible under section 80CCD (1)
4) When pension is received out of the aforesaid amount it will be chargeable to tax in the hands of the recipient
5) ‘Salary’ for the purpose of points 1 and 2 includes dearness allowance but excludes other allowances and perquisites.
The aggregate amount of deduction under Sections 80C, 80CCC and 80CCD (1) i.e., contribution by the employee towards the notified pension scheme can not exceed Rs 1.5 lakh.
Although from assessment year 2012-13 onwards, employers contribution towards NPS is not considered for the purpose of the monetary ceiling of Rs 1.5 lakh. Under Section 80CCD (2), any contribution made by the employer to the NPS is deductible in the hands of employee over and above the Rs 1.5 lakh monetary limit but subject to 10% of the salary. Further from FY16, in addition to the deduction u/s 80CCD (1), deduction of Rs 50,000 has been allowed on contribution in NPS under Section 80CCD(1B).