🧓 What is Pension in Salary: Meaning, Types, Taxability & Exemptions Explained

📑 Table of Contents

1. What Is Considered as Salary?
2. What Is Pension?
3. Types of Pension
4. Pension Payment Structure
5. Taxability of Pension under Income Tax Act
6. Commuted vs Uncommuted Pension
7. Exemptions on Pension Income – Section 10(10A)
8. Pension Received by Family Members
9. Reporting Pension in Income Tax Return (ITR)
10. Common Mistakes to Avoid
11. Tips to Save Tax on Pension
12. Documentation Required
13. Pension Calculation Example
14. Summary Table: Pension Taxability at a Glance
15. Internal & External Links
16. FAQs

1. 📌 What Is Considered as Salary?

Salary includes:

• Basic Pay
• Dearness Allowance
• House Rent Allowance
• Special Allowance
• Perquisites
• Retirement Benefits like Pension, Gratuity, Leave Encashment

👉 Pension is considered a form of deferred salary and is taxable under “Income from Salaries”.

2. 🧓 What Is Pension?

Pension is a regular payment made by an employer or government to employees after retirement, as a reward for past services.

It can be:

• Self-received pension: By the employee
• Family pension: By legal heirs/spouse after employee’s demise

3. 🧾 Types of Pension

4. 💰 Pension Payment Structure

Pension can be received via:

• Pension Funds (e.g., NPS)
• Government Treasury
• Employer-managed Pension Trusts
• Insurance Companies (e.g., LIC annuities)

5. 💸 Taxability of Pension Under Income Tax Act

6. 🔄 Commuted vs Uncommuted Pension

7. 📜 Exemptions Under Section 10(10A)

Section 10(10A) governs exemption rules for commuted pension:

• Full exemption for Govt employees
• Partial exemption for others:
  • 1/3rd exempt if gratuity received
  • 1/2 exempt if gratuity not received

8. 👪 Pension Received by Family Members

• Not treated as salary
• Taxable under: Income from Other Sources
• Deduction under Sec 57(iia): ₹15,000 or 1/3rd of amount, whichever is lower

9. 📝 Reporting Pension in ITR

👉 Ensure to report commuted/uncommuted correctly in salary schedule.

10. ⚠️ Common Mistakes to Avoid

• Reporting pension under “Other Income” instead of “Salary”
• Not declaring commuted pension
• Family pension shown in salary schedule
• Ignoring deductions available on family pension
• Claiming wrong ITR form

11. 💡 Tips to Save Tax on Pension

• Invest in Section 80C instruments (e.g., PPF, LIC)
• Opt for NPS for additional ₹50,000 deduction under 80CCD(1B)
• Claim Section 80D medical insurance deductions
• Plan commutation if eligible for tax exemption

12. 📋 Documentation Required

1. Pension Payment Order (PPO)
2. Pension Certificate from employer/treasury
3. Bank statements
4. TDS Certificate (Form 16 or 16A)
5. Employer letter for commuted pension
6. Form 26AS / AIS

13. 📊 Pension Tax Calculation Example

Case: Mr. Sharma, Ex-Govt employee, received ₹15 lakh commuted pension and ₹40,000 monthly pension.

14. 📘 Summary Table: Pension Taxability at a Glance

15. 🔗 Internal & External Links

Internal Links (TaxCrux.com):

• Basic Salary
• Form 26AS
• AIS and TIS

External Link:

• Income Tax India – FAQs on Pension

❓ FAQs

• What is pension under salary income?
  Pension is a post-retirement income treated as deferred salary and taxed under salary head.
• Is commuted pension taxable for all employees?
  No, it is exempt for govt employees and partially exempt for non-govt employees.
• Is family pension taxable like salary?
  No, it’s taxed under “Income from Other Sources” with partial deduction.
• Which ITR should I use for pension income?
  ITR-1 for simple pension and ITR-2/3 if you have other complex income.
• Can senior citizens claim standard deduction on pension?
  Yes, standard deduction of ₹50,000 is available on uncommuted pension.
• What is PPO in pension?
  Pension Payment Order issued by employer/treasury for pension sanction.
• Is pension from NPS also taxable?
  Yes, 60% withdrawal is tax-free, balance 40% goes to annuity (taxable).
• Can I claim deduction on family pension under Section 80C?
  No, but Section 57 allows a fixed deduction.
• What happens if pension is not declared in ITR?
  It may lead to mismatch in AIS/Form 26AS and result in notices.
• Is TDS deducted on pension?
  Yes, if taxable pension exceeds basic exemption limit.

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