The taxability of pension is laid out as per Section 17(1)(ii) of the Indian Income Tax Act.

The term ‘pension’ signifies payment for past services. Here too, the relationship of employer and employee is required. However, it is the past relationship of employer and employee that counts.

Pension is a periodical allowance (in many cases, monthly) or a stipend granted on account of past services or particular merits. But this is not granted in respect of any right, privilege, perquisite or status.

Pension can also be granted to the family of a deceased employee or deceased former employee. In such a case, it is called “family pension”.

Pension is of two types:

Uncommuted pension: In simple words, uncommuted pension is the monthly amount of pension received or receivable. This is taxable as salary. Standard deduction can be claimed on the uncommuted pension.

Commuted pension: There is an option to convert a specified percentage of the monthly pension and receive it upfront is called commuted pension. This is a one-time receipt. After the receipt of commuted pension, the monthly amount of uncommuted pension is reduced to the extent of the percentage converted from uncommuted to commuted pension.

Commuted pension is exempt to some extent as per Section 10(10A) as under:

Ø  For employees of Government, Local Authority or Statutory Corporations, any amount of commuted pension is exempt.

For other employees:

Employees in receipt of gratuity: The actual amount received on commutation of pension subject to the maximum of 1/3^rd of the pension (uncommuted) which he is normally entitled to.

Employees not in receipt of gratuity: The actual amount received on commutation of pension subject to the maximum of half of the pension (uncommuted) which he is normally entitled to.

Commuted pension in excess of the above limits is taxable. However, relief under section 89(1) can be claimed.

Family Pension: Family pension is taxable as income from other sources.

However, family pension received by the widow or children or nominated heirs, as the case may be, of a member of armed forces (including para-military forces) of the Union, where the death of such member has occurred in the course of operational duties, duly certified by the head of the department where the deceased member last served or the service headquarters, that the death of the member has occurred in the course of operational duties in the circumstances mentioned below:

As per Rule 2BBA, the circumstances of death specified are the following:

1.    Acts of violence or kidnapping or attacks by terrorists or anti-social elements.

2.    Action against extremists or anti-social elements.

3.    Enemy action in international war.

4.    Action during deployment with a peace keeping mission abroad.

5.    Border skirmishes.

6.    Laying or clearance of mines including enemy mines as also mine sweeping operations.

7.    Explosions of mines while laying operationally oriented mine-fields or lifting or negotiation mine-fields laid by the enemy or own forces in operational areas near international borders or the line of control.

8.    In the aid of civil power in dealing with natural calamities and rescue operations.

9.    In the aid of civil power in quelling agitation or riots or revolts by demonstrators.

Pension received by officials of United Nations: Amount of pension received by retired officials of the United Nations Organisation is exempt from tax in view of section 18(b) of the article V of the Schedule to the United Nations (Privileges & Immunities) Act, 1947. (Vide CIT Vs Kolhatkar (1995) 211 ITR 650 (Bom))

Exemption to Supreme Court and High Court Judges for commuted value of pension: The Supreme Court and High Court Judges are also entitled to the exemption under section 10(10A) to the extent of commuted value of one-half of their pension (vide Circular No.623 dated 6.1.1992.)

Government Employees absorbed in public sector undertakings: In case of a government employee absorbed in a public sector undertaking and any lumpsum payment is made to such person on commutation of pension, the same is wholly exempt from tax (vide CK. Karunakaran Vs Union of India (1980) 4 Taxman 178 (Del).

Contributory Pension: Amounts received under contributory pension scheme are taxable.