Is pension taxable? All you need to know about Pension and its Taxability
Pension is the amount that one invests periodically in the pension fund to receive a regular income post retirement. Few organisations still create pension fund for their employees in which employees contribute a part of their salary each month and employer also top it up . In addition to employer run pension schemes, most of the Life Insurance Companies also have pension products. Salaried as well as non salaried people can enrol for the same and save for their sunset years.
Once a person turns 60 years old, one can withdraw the pension amount ( also called annuity) from these schemes. However, the most common question asked by anyone who invests in any type of retirement benefits scheme is- “is pension income taxable?” Let’s understand this in detail.
Income tax on pension
Yes, pension is taxable. However, the tax on pensions in India is different from the regular tax that you pay on income. But before we dive into that, let us understand some terminologies first.
There are mainly 2 types of pensions that one can receive:
- Commuted Pension – this is a portion of the total retirement benefit/ fund value which one may choose to receive in lump sum before start of regular pension income. This portion can be tax exempt. Amount of exemption may depend upon whether gratuity is received or not and the terms of the scheme
- Uncommuted Pension – this is the portion of the pension which one receives periodically, usually on a monthly basis.
Any uncommuted pension is fully taxable.
Pension under the Income Tax Act
Pension is taxable as per normal income tax rates. Good news is that one can claim various deductions and save taxes even out of pension income
How to avoid tax on pension lump sum
- Standard deduction – Salaried pensioners can claim a deduction of Rs. 50000 as a standard deduction out of pension received from their previous employer
- Deduction under section 80C – one is eligible for deductions of up to Rs. 1.5 lakhs when they invest in different avenues like Life Insurance Premium, Senior Citizen tax Savings Fixed deposit, PPF and more.
- Deduction under section 80D – under this section, one can claim a deduction if they invest in a senior citizen health insurance plan
- Deduction under section 80 (DDB) – one can claim a deduction up to Rs. 1lakh under this from certain illnesses such as AIDS, cancer, renal failure, etc.
While income from pension is taxable, investing in a pension scheme can help go a long way in your golden years. Saving in a pension scheme also comes with certain tax benefits that one can avail of during their income earning years.
*Tax Benefits are as per prevailing tax laws, which are subject to change.
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