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Taxability of commuted pension

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Taxability of commuted pension received by an individual is covered by Section 10(10A) of the Income Tax Act, 1961.

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Receipts which are fully exempt [10(10A)(i) & (iii)]

 

Commutation of pension received is fully exempt in the following cases:​

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• Amount received under the Civil Pensions (Commutation) Rules of the Central Government.

• Amount received under similar scheme applicable to:

  • the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or

  • to the members of the all-India services or

  • to the members of the defence services or

  • to the members of the civil services of a State or

  • holders of civil posts under a State or

  • to the employees of a local authority or

  • a corporation established by a Central, State or Provincial Act.

• any payment in commutation of pension received from a fund set up under section 10(23AAB) of the Income Tax Act, 1961 by the Life Insurance Corporation of India or any other insurer under a pension scheme to which contribution is made by any person for the purpose of receiving pension from such fund and which is approved by Insurance Regulatory and Development Authority.

 

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Civil services, civil posts and all india services denotes the civil side of administration whereas defence services and posts connected with defence denotes the defense side of administration in the country.

 

Civil services comprises of civil services of the union and the state. All india services are common to both central and the state and comprises of Indian Administrative service, Indian Police service and Indian Forest service. Civil post means government service other than those services of Union or States which are formally constituted services. All posts hold by the public servants other than the posts in the Defence Forces shall be deemed to be civil posts.

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Defence service means established defence services and post connected with defence denotes post which is controlled by the defence side of administration of the country.

 

Local authority shall mean a municipal committee, district board, body of port Commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund (Section 3(31) of the General Clauses Act, 1897). This includes Municipalities, District Boards, Panchayats, Port Trusts as decided in various judicial decisions.

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Where an Act itself establishes a Corporation, it is a Corporation established by the Act. The Act may be a Central, State or Provincial Act. Examples are State Bank of  India established by the State Bank of India Act, Life Insurance Corporation established by the Life Insurance Corporation Act.

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Summarising, commuted pension received by employees of Central and State governments, local authority and statutory corporation is fully exempt from income tax. Also commuted pension received from pension fund set up by LIC or other insurer approved by IRDA is also fully exempt. There are further exemptions as provided by various circulars as follows:

 

• Judges of the Supreme Court and High Courts will be entitled to the exemption of the commuted portion under section 10(10A)(i) of the Act vide Circular No. 623 dated 6-1-1992.

• Salary received by employees of the UNO or any person covered under the UN (Privileges and Immunities), Act, 1947 and pension received by them from the UN will also be exempt from income-tax as per Circular No. 293 dated 10/02/1981.

• Lump sum amount received in lieu of pension by persons absorbed in public sector corporations will be fully exempt under 10(10A)(i) as per Circular No. 286 dated 17/11/1980.

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Receipts which are partially exempt [10(10A)(ii)]

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​Commutation of pension received in the following cases is exempt partially:​

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• any payment in commutation of pension received under any scheme of any other employer is exempt subject to the limit as follows:

  • where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and

  • in any other case, the commuted value of one-half of such pension.

 

The commuted value for this purpose shall be determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognized tables of mortality.

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Consider an example of Mr.Nakul who retired on 31/01/2020 after 40 years of service from a private company. He is entitled to a pension of Rs.30000 of which he commuted 40 percent and received Rs.12 Lakhs.

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Exemption shall be computed as follows:

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• If he had received gratuity:

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Commuted value of full pension => Rs.1200000*100/40 => Rs.3000000

1/3rd of commuted value => Rs.1000000

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Amount of exemption: 1000000

Taxable amount  => Rs.200000 [Rs.1200000- Rs.1000000]

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• Other than the case where gratuity is received:

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Commuted value of full pension => Rs.1200000*100/40 => Rs.3000000

1/2 of commuted value => Rs.1500000

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Amount of exemption: 1500000

Hence no amount is taxable.

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The uncommuted amount of Rs.18000 will be taxable.

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Relief under Section 89

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Where the amount received by way of commutation of pension exceeds the amount exempted under this clause, the assessee can claim relief under Section 89 read with Rule 21A(5). The relief shall be calculated as under: