Pension Is Taxable Under Which Head—Find Out

We’ve all heard of pension, it’s the most common form of post-retirement income in India. Despite this, there still remains confusion among many retirees and families. Questions like, “Pension is taxable under which head of income, how is it treated, and what exemptions are applicable” are common.

We have the answers to all your questions right here, so let’s get into it.

Pension is Taxable Under Which Head of Income?

When filing your tax returns, you may wonder where your pension should fall. The pension that you receive from your past employer is taxed under the head ‘Income from Salary,’ and not under ‘Income from Other Sources’.

The reasoning behind this is, even though you’re not working there anymore, the pension you receive is considered a continuation of your salary as it is paid for the services you rendered during your employment.

Types of Pension and How They Are Taxed

Once you know the type of pension you receive, you can understand how the tax applies, too.

• Uncommuted Pension (Monthly)

This is the regular monthly pension that is fully taxable and filed under ‘Income from Salary’. There are no special exemptions available in this type.

• Commuted Pension (Lumpsum)

This is when you receive part of your pension upfront as a lump sum. Government employees are fully exempt from taxes while non-government employees are partially exempted under Section 10(10A). If you’ve received your gratuity, 1/3rd of your pension is exempt from taxes, and if not, half of your pension is exempt. The remaining parts of your pension is taxed under ‘Income from Salary’.

When is Pension Taxed Under ‘Income from Other Sources’?

There is only one instance when pension is not  taxed under ‘Income from Salary’. This is when a family member (spouse or children) received pension after the death of an employee. 

Family pension is not counted as salary income as the family member receiving the pension never worked for the employer. This is taxed under the head ‘Income from Other Sources,’ and under Section 57(iia), the family member can claim Rs. 15,000 or ⅓ rd of the pension, whichever is lesser.

Takeaway

The confusion of ‘pension is taxable under which head’ is easy to solve. If it’s your own pension, it’s under the head ‘Income from Salary,’ and if it’s a family pension, it’s taxed under ‘Income from Other Sources.’

Understanding this can help you plan your retirement and savings better and avoid confusion during the tax season.