How is Pension Taxed?

Usually pension received by a retired employee is taxed under the head ‘Income from Salary’, however pension received by family member is taxed under the head ‘Income from Other Sources’. The tax treatment of Pension is different in different situations –

How is Pension Taxed*What is Commuted Pension – At the time of retirement, you can choose to receive a certain % of your pension in advance. Such pension received in advance is called commuted pension. For e.g. – At the age of 60, you decide to receive in advance 10% of your monthly pension of the next 10 years of Rs 10,000. This will be paid to you as a lump sum. Therefore, Rs 1000x12x10 = 1,20,000 is your commuted pension. You will continue to receive Rs 9,000 (your uncommuted pension) for the next 10 years until you are 70 and post 70 years of age, you will be paid your full pension of Rs 10,000.

In our next post we will look at how Compensation received at Voluntary retirement or separation is treated for Income Tax purposes. If you have any questions please write to us

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