Payment in commutation of pension [Section 10(10A)] :
Pension is of two types: commuted and uncommuted.
Uncommuted Pension: Uncommuted pension refers to pension received periodically. It is fully taxable in the hands of both government and non-government employees. Commuted Pension: Commuted pension means lump sum amount taken by commuting the whole or part of the pension. Its treatment is discussed below:
(a) Employees of the Central Government/local authorities/Statutory Corporation/ members of the Defence Services: Any commuted pension received is fully exempt from tax.
(b) Non-Government Employee: Any commuted pension received is exempt from tax in the following manner:
If the employee is in receipt of gratuity,
| Exemption | = 1/3rd of the amount of pension which he would have received had he commuted the whole of the pension. |
| = [ 1/3 * commuted pension received / commutation % * 100% ] |
If the employee does not receive any gratuity
| Exemption | = ½ of the amount of pension which he would have received had he commuted the whole of the pension. |
| = [ 1/2 * commuted pension received / commutation % * 100% ] |
Note:
1. Judges of the Supreme Court and High Court will be entitled to exemption of the commuted portion not exceeding ½ of the pension.
2. Any commuted pension received by an individual out of annuity plan of the Life Insurance Corporation of India (LIC) from a fund set up by that Corporation will be exempted.
Illustration 7
Mr. Sagar retired on 1.10.2015 receiving ` 5,000 p.m. as pension. On 1.2.2016, he commuted 60% of his pension and received ` 3,00,000 as commuted pension. You are required to compute his taxable pension assuming:
a. He is a government employee.
b. He is a non-government employee, receiving gratuity of ` 5,00,000 at the time of retirement.
c. He is a non-government employee and is not in receipt of gratuity at the time of retirement.
Solution
(a) He is a government employee.
| Uncommuted pension received (October – March) | Rs 24,000 | |
| [ (Rs 5,000 × 4 months) + (40% of Rs 5,000 × 2 months)]
Commuted pension received |
Rs 3,00,000 | |
| Less : Exempt u/s 10(10A) | Rs 3,00,000 | NIL |
| Taxable pension | Rs 24,000 |
(b) He is a non-government employee, receiving gratuity Rs 5,00,000 at the time of retirement.
| Uncommuted pension received (October – March) | Rs 24,000 | |
| [(Rs 5,000 × 4 months) + (40% of Rs 5,000 × 2 months)]
Commuted pension received |
Rs 3,00,000 | |
| Less: Exempt u/s 10(10)
[ 1/3 * Rs 3,00,000 / 60% * 100% ] |
Rs 1,66,667 | Rs 1,33,333 |
| Taxable pension | Rs 1,57,333 |
(c) He is a non-government employee and is not in receipt of gratuity at the time of retirement.
| Uncommuted pension received (October – March) | Rs 24,000 | |
| [(Rs 5,000 × 4 months) + (40% of Rs 5,000 × 2 months)]
Commuted pension received |
Rs 3,00,000 | |
| Less: Exempt u/s 10(10)
[ 1/3 * Rs 3,00,000 / 60% * 100% ] |
Rs 2,50,000 | Rs 50,000 |
| Taxable pension | Rs 74,000 |