Meaning of Commuted Pension:- When any lump-sum payment is made in lieu of periodical payment of pension then it will called as commuted pension.
Treatment of Commuted Pension from Income Tax Point of View:- The Pension is an income. As per Indian Income Tax Act, the receipt from pension is treated as under:-
- Any payment received as commuted pension by Government employees or Semi-Government employees under Civil Pension (Commutation) Rules or any other such rules, is fully exempt from income tax.
- Commuted pension received by other employees i.e. private sector employees, will be exempt subject to the following terms & conditions:-
- In case any gratuity is received by any employee then the commuted value of one third of normal pension shall be exempt.
- In case no gratuity received by the employee then the commuted value of half of normal pension shall be exempt.
Illustration: Mr. X is Central Government employee. He retired from his services on 31.12.15. His normal pension was fixed at Rs.22000/= per month.. He commutes Rs.15000/= of his pension and receives Rs.12,00,000/=. He also received gratuity for Rs.700000/=. Compute his taxable income during financial year 2015-16.
Solution: Since Mr. X is a Central Government employee therefore his income from commuted pension shall be totally exempt from income tax.
Illustration: Mr.Y was working with a private firm. He retired on 31.07.15. His pension was fixed for Rs.15000/= per month. He commutes Rs.12000/= and receives Rs.960000/=. Compute his exempted income for financial year 2015-16 from income tax if (a) he received Rs.500000/= as gratuity or (b) he did not receive any gratuity.
(a) if Mr. Y received gratuity:-
Amount exempt = commuted value of 1/3rd of normal pension
= ——— x ——– = 320000
(b) If Mr. Y did not receive gratuity
Amount exempt = Commuted value of ½ of normal pension
= ——— x ——– = 480000/=
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