Retirement, for most of the population, means a sudden stoppage of income from work. This may affect different people differently. For someone who doesn’t have a corpus or a pension account, figuring out their financials after retirement could become extremely difficult.
But if you have a corpus ready or a monthly income scheme planned, your life becomes much easier.
But one confusion a lot of people have regarding pension and retirement corpus is about the taxability of the same. Let us learn more about pension funds and see if they will attract tax in your case.
Commuted vs uncommuted pension
Most pension schemes are built with regular monthly contributions towards a fund. If you have started early and have made regular contributions, you will end up with a considerable corpus at the end of the tenure, aka your retirement.
Now, there are two ways you can go about utilising the fund. You can either withdraw a lump sum amount of money and use it in a way that is beneficial for you to survive financially for the rest of your life.
On the other hand, you can choose to receive the corpus you have built as a monthly pension. This will turn out to be a continuation of your monthly income.
Here, the choice should be dependent on multiple factors, including your personal preferences. Both ways have their pros and cons.
For instance, if you choose to receive the lump sum at once, you could invest the same in a more beneficial fund. On the other hand, if you don’t want the responsibility of handling such a big fund, you could choose to receive a monthly pension.
Now, the way these ways are taxed is different. Let us what the differences in taxation are.
Taxation – commuted and uncommuted pension
- A commuted pension may receive certain tax benefits. This will be according to the pension scheme you have chosen and the type of employee you are.
For instance, if you have invested in the National Pension Scheme, up to a certain limit of withdrawal is tax-free.
- If you are a central government employee, the corpus you withdraw at the time of withdrawal tends to be completely tax-free. The case of state government employees depends on the state you are in.
- If you are a non-government employee, only a partial amount is tax-free. For instance, if you also receive gratuity, ⅓rd of the 100% of the amount you could withdraw is tax-free. For instance, if your corpus at retirement is Rs.9 lakh, you can withdraw up to Rs.3 lakh without any tax.
- But in case you don’t receive a gratuity, half of the total corpus is tax-free. For instance, in the above example, you can withdraw up to Rs.4.5 lakh without any tax.
- Uncommuted pension, for both government and non-government employees, is considered income and is taxable.
- But there has been a proposition from the government that if the pension is the only source of income for a senior citizen, the same is exempt from tax.
Pension received by a relative
In certain cases where the pensioner has passed away, certain relatives of this person may be eligible to receive the pension. But how is this pension taxable? Let us examine.
- Such income comes under the ‘income from other source’s tab on the ITR website.
- If the pension is paid in a lump sum, it may be tax-exempt.
- An uncommuted pension is taxable but has certain exemptions according to the type of pension you receive.
Building a pension fund is extremely important. But it is equally important to pay the right taxes on your pension as well to avoid complications. Follow the above pointers and ensure you pay the right tax.