• Notification Date: 30-08-2023
  • Notification No: N/A

Income Tax on Pension: Tax Payable on Pension

Pension is a guaranteed income received by individuals on a regular basis even if they are not employed or earning a salary. This helps retirees maintain their standard of living and cover their necessary expenses. Overall, pensions play an essential role in providing retirees with financial security and stability in India. 

An annuity, also known as a pension, is a lump sum payment made on a regular basis after retirement or when a pension plan matures. Deferred pension plans and immediate annuity plans are the two types of pension plans available in India. In an immediate annuity plan, the pension begins the following month, whereas, in a deferred pension plan, the investor must continue investing for a predetermined amount of time before receiving a pension.   

The source of pension may differ depending on the individual. Employees in both the public and government sectors may receive a pension from the employees’ pension scheme, the National Pension System (NPS), or both. Additionally, a few pension plans offered by life insurance firms can help individuals save money until retirement and then receive a regular pension. 

Taxability of pension  

While selecting the right pension plan, it’s crucial to consider the taxability of the pension. Post-retirement for an employee, pension is effectively a source of income and is subject to taxation under the Income Tax Act, 1961 under the head ‘Income from Salary’. Similarly, pension payouts from life insurance companies' pension or annuity plans would be subject to taxation under the head ‘Income from Other Sources’. It means the individual receiving the monthly, quarterly, half-yearly, or annual pension must declare the amount in the income tax return (ITR) and pay tax if applicable. 

The commutation of pension, which results in a lump sum payment in place of regular monthly payments, is another important aspect of a pension plan. The commutation of a pension is largely tax-free, even though the pension or annuity is fully taxable under the current income tax legislation.  

Taxability of pension – For Senior Citizens 

Remember, by the time one starts getting a pension, he or she would have attained the status of a senior citizen. For senior citizens, whether they show a pension under the ‘Income from Other Sources’ head or ‘Income from Salary’ head, the pension payments are subject to income tax at the rates specified in their income tax bracket, depending on their age and the option they choose to file ITR.  

The tax-exempt income tax limit differs across the Old Tax Regime and the New Tax Regime. The income tax exemption limit, under Old Tax Regime, differs for those between 60 and 80 years and for those above age 80.  As a taxpayer, one needs to calculate the tax liability under both regimes to arrive at the right conclusion of choosing the old or the new tax regime. 

Senior citizens above a specific age and meeting certain criteria are, additionally, given some relief as far as ITR filing is concerned. Under Section 194P of the Income Tax Act, 1961, senior citizens above the age of 75 years are exempted from filing the income tax return provided their only source of income is pension and interest from the same bank in which the pension is received.  

Taxability of pension – Family Pension 

On the death of the pensioner, there are income tax provisions for the spouse to keep getting the pension. In the hands of a family member, the family pension is taxed under the head ‘Income from Other Sources’. However, as a relief measure, a deduction of one-third of the uncommuted pension received or Rs.15000, whichever is less, is allowed. 

The primary goal of a pension is to give you a steady flow of fixed income when you retire. As life expectancy is rising and inflation is rising, the pension your employer offers—which is based on your basic pay and number of years of service—might not be sufficient to sustain your lifestyle in your golden years. As a result, think about contributing to your retirement through a pension plan to supplement your employer-provided pension income.  

HDFC-Life’s Systematic Pension Plan is an exclusively designed pension plan that helps you build a corpus for retirement so that you can live a comfortable life. With new features and customized flexible options, HDFC-Life’s Systematic Pension Plan is the right option to provide a pleasant and worry-free post-retirement lifestyle.