Retirement marks a significant transition, bringing with it the assurance of financial stability through pensions. For many retirees, understanding how their pension income is taxed is crucial to ensure compliance and maximize savings. Whether you receive a monthly pension or a lump sum (commuted pension), it’s essential to know the tax implications and benefits available, especially with the recent changes introduced in Budget 2024. This guide provides a detailed overview of pension taxation, including key updates, tax rates, and reporting requirements, helping pensioners navigate their income tax returns effectively.
Pension income is considered as salary under the Income Tax Act, 1961, and is taxed accordingly. Pensions are either received periodically (monthly) or as a lump sum (commuted pension). Recently taxation of pension is changed in Budget 2024:
| Catagory | Previous Limit | Revised Limit (FY 2024-25) |
|---|---|---|
| Family Pension Deduction | ₹ 15,000 or 1/3rd of pension amount | ₹ 25,000 or 1/3rd of pension amount |
| Standard Deduction | ₹ 50,000 | ₹ 75,000 (under New Regime only) |
Types of Pension:
| Type | Description | Taxability |
|---|---|---|
| Uncommuted Pension | Periodic pension payments (monthly, quarterly, etc.) | Fully taxable under the head ‘Income from Salaries’. |
| Commuted Pension | Lump sum amount received in advance instead of periodic payments. | Government Employees: Fully exempt. Non-Govt. Employees: Partially exempt based on gratuity. |
Taxability of Commuted Pension for Non-Government Employees:
| Scenario | Exemption Rule |
|---|---|
| With Gratuity Received | 1/3rd of the commuted pension is exempt; the rest is taxed as salary. |
| Without Gratuity Received | 1/2 of the commuted pension is exempt; the rest is taxed as salary. |
Note: Exemption under Section 10(10A) applies in both old and new tax regimes
Tax Slabs Comparison:
Old Tax Regime (Senior Citizens):
| Income (₹) | 60-80 Years (Rate) | Above 80 Years (Rate) |
|---|---|---|
| Up to ₹ 3,00,000 | Nil | Nil |
| ₹ 3,00,000 – ₹ 5,00,000 | 5% | Nil |
| ₹ 5,00,000 – ₹ 10,00,000 | 20% | 20% |
| ₹ 10,00,001 and above | 30% | 30% |
New Tax Regime :
| Income (₹) | Tax Rate |
|---|---|
| Up to ₹ 3,00,000 | Nil |
| ₹ 3,00,000 – ₹ 7,00,000 | 5% |
| ₹ 7,00,000 – ₹ 10,00,000 | 10% |
| ₹ 10,00,000 – ₹ 12,00,000 | 15% |
| ₹ 12,00,000 – ₹ 15,00,000 | 20% |
| More than ₹ 15,00,000 | 30% |
How to Report Pension Income in ITR:
Steps in ITR-1:
- Go to the ‘General Information’ section.
- Select ‘Nature of Employment’ → Choose ‘Pensioners’.
- Types of Pensioners:
- CG (Central Government) Pensioners
- SG (State Government) Pensioners
- PSU (Public Sector Undertaking) Pensioners
- Other Pensioners
In Other ITRs:
- Go to the salary schedule.
- Select “Pensioners” as the nature of the employer.
- Report the exempt portion under ‘Section 10(10A)’ for commuted pension.
Family Pension Taxation:
- Head of Income: Income from Other Sources
- Deduction (FY 2024-25): ₹ 25,000 or 1/3rd of the pension amount (whichever is lower).
Example:
| Family Pension Received | Deduction Calculation | Taxable Amount |
|---|---|---|
| ₹ 1,00,000 | ₹ 25,000 (Lower of ₹ 25,000 or ₹ 33,333) | ₹ 75,000 (₹ 1,00,000 – ₹ 25,000) |
Special Cases:
- UNO Pension: Fully exempt.
- Armed Forces Pension: Fully exempt for family members.
- Senior Citizens (75+ years): Exempt from ITR filing if income consists only of pension and interest, and banks deduct TDS under Section 194P.
Understanding pension taxation is crucial for both retirees and family members. The Budget 2024 has introduced significant benefits, including increased deductions for family pensions and standard deductions under the new tax regime. Proper reporting in ITR ensures compliance and optimizes tax savings.
Visit www.cagurujiclasses.com for practical courses
