Taxability on Commuted Pension

One of GConnect Readers wanted to know about the taxability in respect of Commuted Portion of Pension and Dearness Relief paid on the Commuted Portion of Pension.

Income Tax Act 196 provides the taxability of pension depending on whether the pension received is periodical or lump sum.

Commutation of Pension means payment of lump sum amount in lieu of a portion of pension surrendered voluntarily by the pensioner based on duration of period in relation to the age. This is purely an optional facility provided by the employer to his employee. As per the Act following rules are applicable for the taxability of commuted pension:

Any commuted pension (i.e Lumpsum Pension) received by an employee of the Central Government, State Government, Local Authority or Statutory corporation is wholly exempt from tax.

Un-commuted Pension (Periodical Payment) is fully taxable as salary under section 15 of the Act. This provision is applicable for both Government and other salaried class. Apparently, the dearness relief payable on Commuted portion, which is received by the pensioner on monthly basis along with un-commuted pension is also taxable.

Payment in commutation of pension received by any other employee:

(a)     in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive is exempt from tax.

(b)   in any other case, the commuted value of one-half of such pension is exempt from tax.