Income Tax for Pensioners

Income Tax Rules for Pensioners:

The Union Budget 2018 was announced recently and has introduced a standard deduction of Rs.40,000 with respect to miscellaneous medical expenses and transport allowance. This tax reform is going to offer tremendous benefit to pensioners and salaried employees.

Section 60 of the CPC and section 11 of the Pension Act describe ‘pension’ as an allowance (periodical) or a stipend given for any past service rendered to an organisation and/or special merits. Firstly, pension is compensation offered for past service rendered in an employer-employee relationship. Secondly, pension paid is based on a previous ‘agreement of service’ and not an ‘agreement for service’ which only ends upon the death of an employee. It is important to note that pension amount which is received from a previous employer is taxed under the head of ‘salary’. As a result, several deductions on salary income such as under section 89(1) is given to pensioners who get their pension from a nationalised bank and disbursing and drawing officers. Likewise, adjustment in terms of tax rebate under section 88 and 88B is done by the bank during tax deduction at source from the pension.

Income Tax Form for Pensioners:

The government notified four Income Tax returns forms that are applicable to Hindu Undivided Family(HUF) and individual.

Income Tax for Pensioners

Form No. ITR 1: Alternatively known as Sahaj (easy) this form can only be filed by an individual assessee. It is important to note that this form can only be used by an individual who has ‘salary’ as his or her source of income and not any business enterprise.

Form no. ITR 1 can be used by pensioners to file their income tax returns. This form is used by majority of salaried taxpayers who own one house and have their income which is taxable (Income from other sources) in addition to their pension.

How to Calculate Income Tax for Pensioners?

Your pension is taxed as your salary income in that the pension amount is taxed under the head ‘salary’ in your Income Tax Return form. While pension is paid on a monthly basis, it can also be received as a lump sum in the form of commuted pension. On the other hand, pension paid on a periodical basis, known as uncommuted pension can be fully taxed as salary.

In some cases, commuted pension may be tax exempt such as pension received by any of your family members (taxed under the head ‘income from other sources’) if it is in the form of a lump sum payment. Likewise, uncommuted pension which is received by any of your family members is exempt up to Rs.15,000 or 1/3rd of the pension amount, whichever is less. However, any pension from the United Nations Organisation (section 2 of the UN privilege and immunities act, 1947) is exempt from tax as is pension received by kin of Armed Forces.Section 57 describes family pension as a monthly amount paid to a person belonging to the family of an employee by the employer in the event of the unfortunate demise of the former. Given that there is no employer-employee relationship in the said scenario, family pension is taxed as ‘Income from Other Sources’.

How much Tax do I Pay on my Pension?

If the taxable income of an individual is above the exemption limit, he or she has to file tax returns. Pension income from an employer is taxed as salary income while interest on various investments is taxed as income from other sources. The interest income is tax-exempt when it comes to Public Provident Fund (PPF). If your (pensioner) taxable income (pension in addition to taxable interest minus investments such as PPF, health premium which are eligible for deduction) is above the exemption limit in an assessment year, you will have to file your Income Tax returns. The commuted pension in case of central/state government and defence services employees (central/state acts) is tax exempt while it is partially exempt for non-government employees. If non-government employees, receive gratuity along with pension, 1/3rd of the pension (provided 100% is commuted) is exempt while the remaining amount is taxable as salary. If non-government employees receive only pension, ½ of pension amount (if 100% is commuted) will be exempt from tax.

TDS Pensioners:

If you (pensioner) receive your pension via a nationalized bank, TDS provisions are applicable as is the case for salary income. The banks are allowed deductions as per chapter VIA. Likewise, banks also grant relief under section 89(1) for any pension arrears. It is important to note that TDS is not deducted on family pension as the latter does not come under the ambit of section 192 of the Income tax act.

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