In this article, we will know what pension is and its benefits, its types and its pension plans in India. We will also be going to know the tax treatment of pension
What is Pension
A pension is a retirement fund into which periodic payments are made by the government or companies or employers to the employees in consideration of services served by the employee.
Benefits of Pension
- Assured Income
Pension Plans gives you fixed and assured periodic or monthly income
After your retirement. It will give you financial security in your old age.
- Best Investment Plan
Pension is the best investment plan for the individual. In the long term, it will give you an 8-12% return which is over and about the inflation rate of 6% every year.
- Tax benefits
Pension plans provide you tax deductions up to Rs 1.5 lacs under the section 80C, 80CCC, 80CCD of Income-tax act. Pension reduces your tax liability up to Rs 1.5 lacs or Amount invested whichever is lower
- Financial Protection
Pension also gives you financial protection in your old age when you are not able to do work. It will give you monthly or periodic payments as per the pension plans.
Types of Pension
Pension are of two types for the Income-tax Act
- Commuted Pension: When any person withdraws the full amount of pension in a lump sum after retirement then it will be termed as Commuted Pension.
- Uncommuted Pension: When a person receives monthly payments of pension then it will be termed as Uncommuted Pension.
Types of Pension Plan in India
1. Deferred Annuity
2. Immediate Annuity
3. Annuity Certain
4. With Cover Pension Plan
5. Life Annuity
6. National Pension Scheme (NPS)
7. Pension Funds
8. Guaranteed Period Annuity Plan
Taxability of Pension.
Pension is formed part of retirement benefits so it is taxable under the head salary and the taxpayers can avail exemption specified in section 10(10A) and can also benefit from deductions of section 80C, 80CCC, 80CCD Under the income tax act, 1961.
Exemption in respect of Commuted Pension [Section 10(10A)]
As per section 10(10A), the payment in respect of commuted pension is exempt, subject to the conditions specified therein. Its treatment is discussed below:
1. Employees of the Central Government/ local authorities/ Statutory Corporation/ members of the Civil Services/ Defence Services:
Any commuted pension received by the Employees of the Central Government/ local authorities/ Statutory Corporation/ members of the Civil Services/ Defence Services is fully exempt from tax.
receives employees
2. Other Employees: Any commuted pension received is exempt from tax to the extent of the following:
- If the employee receives gratuity.
Calculation of Exemption = 1/3rd of the amount of pension which he would have received had he commuted the whole of the pension.
- If the employee does not receive any gratuity
1/3*Commutation Pension Received/Commutation% *100
Calculation of Exemption = ½ of the amount of pension which he would have received had he commuted the whole of the pension.
1/2*Commutation Pension Received/Commutation% *100
Exemption in respect of Uncommuted Pension [Section 10(10A)]
As per section 10(10A), the payment in respect of uncommuted pension is fully exempt from tax.
Deduction in respect of contribution to certain pension funds [Section 80CCC]
Any amount paid or deposited to keep in force a contract for an annuity plan of LIC of India or any other insurer for receiving a pension from the fund.
Permissible Deduction: Amount paid or
deposited, subject to a maximum deduction of Rs 1,50,000.
Deduction in respect of contribution to pension scheme notified by the Central Government [Section 80CCD]
In case of Central Government on or after 1.1.2004 or any other employer or any other assessee, being account under an
individual, who has paid or deposited any amount in his notified pension scheme [to his pension account [Tier I A/c] under National Pension Scheme & Atal Pension Yojana
Permissible Deduction
- Employees Contribution
In case of a salaried individual, deduction of own contribution under section 80CCD(1) is restricted to 10% of his salary.
In any other case, deduction under section 80CCD(1) is restricted to 20% of gross total income. Further, additional deduction of up to Rs50,000 is under section 80CCD(1B). available
Further, additional deduction of upto ` 50,000 is under section 80CCD(1B). available.
- Employer’s Contribution
The entire employer’s contribution would be included in the salary of the employee. The deduction of employer’s contribution under section 80CCD(2) would be restricted to 14% of salary, where the employer is the Central Government; and 10%, in case of any other employer.
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