Is Pension Taxable? - Learn about income tax for senior citizen pensioners

First things first, as per the Indian tax regulations, your pension comes under the category of ‘salary’, and thus, it is taxable. The pension that you receive is a recurring payment that is made to you, and thus according to the Income Tax Act of 1961, it is applicable to income tax. To know more about pensions and taxes, read on.

Types of pension plans:

A pension or annuity is a contract between the insurance company and the pension seeker, where a specific amount of money is invested. The money invested can be deposited as a lumpsum amount or can be paid in the form of regular payments during the period that you are earning. Post that, you receive your pension, the payout of which is the way you have decided. There are broadly two main types of annuity options:

Deferred Annuity:

In a deferred annuity, as the name suggests, the pension starts after a certain period. Here, you regularly make deposits in the policy, which is on a monthly basis, for a specified time period, or you make a single deposit in a lump sum. When the payment term is over, you will start receiving the pension which is given to you throughout your life. So basically, in a deferred annuity, there are three important elements:

• Accumulation, where you deposit money
• Deferemnet, where you stop depositing money and let the corpus grow,
• Vesting, which is the phase when the pension/ annuity starts.

Immediate Annuity:

As the name suggests, with an immediate annuity plan, you can start receiving the annuity soon, without having to wait, as done in a deferred annuity. In an immediate annuity plan, you deposit a lump sum amount in the policy, and the pension starts instantly. As an annuitant, you can opt for:

• Life Option:
  The annuitant receives a pension for as long as they live.
• Joint Life Option:
  The pensioner receives the pension for as long as he/ she lives. Post the death of the pensioner. The appointed nominee will receive the pension for as long as they are alive.
• Annuity Certain:
  The pensioner chooses a specific period of time for which they receive the pension. Incase of their death during this term, the appointed nominee would receive the pension.

National Pension Scheme:

Launched by the central government, the NPS is a voluntary retirement scheme. The government initiated this plan to help people secure their future when they no longer have a regular salary coming in. said to be the world’s most affordable pension scheme, and NPS is open to all Indian citizens who are in the age group of 18 to 70 years. By choosing between an Active Choice or an Auto Choice option, you can design your financial portfolio and get suitable returns. You are free to invest as much as you like in your NPS account.

Tax Implications² in Annuity Plans

1. The tax implications that your pension attracts depend greatly on its type. Pensions may be received on a monthly basis or as a lump sum. Let us take a look at both these types:

Commuted Pension:

A lump sum payment, commuted pension, is received in place of a periodic payment. While the commuted pension for government employees is fully exempt, only a partial exemption is available for non-government employees.

Uncommuted Pension:

Uncommuted pension is the pension that you receive as a periodic payment, generally on a monthly basis. For both governments, as well as non-government employees, the uncommuted pension is completely taxable.⁵

2. A deferred annuity plan, at the time of maturity, allows you a withdrawal of 60% of the total corpus. However, under Section 10(10A), this commutation is tax-free. Only ⅓ rd of the corpus can be commuted tax-free u/s 10(10A).

3. In case a pension plan offers a death benefit, the death benefit, if any, will not attract any taxes.

Income Tax Rate Slabs for Senior Citizens, up to 80 years of age³

Income Tax Rate Slabs for Senior Citizens above 80 years of age³

Worried about your Taxable Pension? Here’s what you can do:

You can thoughtfully pre-plan your finances in a more tax-efficient manner. As a pensioner, you may be looking at measures you can take to reduce the tax your pension attracts. There are various tax-saving investment options that not only give you good returns but also help you claim tax benefits2.

Here are some tax-saving tips²:

1. As per the Income Tax Act, you can make a saving of up to INR 1.5 lakhs in a financial year. Making a regular contribution to the following investments can help you in saving on taxes:

• Senior Citizen Saving Scheme
• Post Office Monthly Income Scheme
• National Savings Certificates
• Public Provident Fund
• Five Year Tax Saving Fixed Deposit
• Mutual Fund Tax Saving Scheme
• Pradhan Mantri Vaya Vandana Yojana
• National Pension System (NPS) (from 2012, any contribution made by the employer to the NPS is deductible in the hands of the employee over INR 1.5 lakh limit which is subject to 10% of the salary).⁴

Section 80TTB allows an exemption of up to INR 50,000 on the interest that you earn from FDs and the saving account

3. Section 80D allows INR 50,000 exemption towards the health insurance premium that you pay

4. For senior citizens, an income up to INR 3 lakhs is tax-free. In case you are over 80 years of age, the tax-free limit is INR 5 lakhs

5. In case you are paying premiums for term plans, your children’s tuition fee or a home loan (only the principal amount), you can claim tax benefits².

Conclusion:

Disappointing as it may be, your pension is taxable. While you may feel that most of the taxes2 are unavoidable, there are ways to mitigate their impact on your hard-earned pension. Understand how the taxability on a pension works, and you will be able to make the most of tax benefits2 and enjoy your second innings all the more.