Pension income is subject to taxation, but the treatment varies based on the type of pension, the country’s tax laws, and whether the pension is received periodically or as a lump sum. Below is a comprehensive guide on pension taxability:
Types of Pensions & Their Tax Treatment
(A) Government & Private Sector Pensions
Periodic Pension (Annuity-based Pension):
- This is a regular income received after retirement.
- Fully taxable as salary income in the hands of the recipient.
- Taxed under the head “Income from Salaries” or “Income from Other Sources” depending on the nature of the pension.
- Standard deductions on pension income may apply (in some countries).
Commuted Pension (Lump Sum Pension):
- If part of the pension is taken as a lump sum at retirement, the taxation varies:
- Government Employees: Fully exempt from tax.
- Private Employees:
- If gratuity is received: 1/3rd of the pension is exempt, and the remaining is taxable.
- If gratuity is not received: 1/2 of the pension is exempt, and the remaining is taxable.
(B) Family Pension (Received by Dependents of Deceased Employee)
- If the pension is received by the spouse/children after the pensioner’s death, it is not considered salary income.
- Taxed under “Income from Other Sources.”
- Exemption Available:
- A deduction of ₹15,000 or 1/3rd of the pension received (whichever is lower) is allowed under most tax laws.
Taxation of Pension in Different Cases
(A) Pension Received by a Resident Taxpayer
- Fully taxable as salary income.
- Standard deduction and slab rates apply.
- If commuted, part of it may be exempt.
(B) Pension Received by an NRI (Non-Resident Individual)
- If received from an Indian source, it is taxable in India.
- Tax treatment in the resident country depends on the DTAA (Double Taxation Avoidance Agreement).
(C) Employer Contribution-Based Pension Plans (e.g., NPS, EPF, Superannuation)
- If an employee contributes, only the self-contributed portion is tax-free.
- Employer’s contribution and interest on pension accumulation may be taxable.
- NPS withdrawal:
- 60% of the corpus is tax-free at retirement.
- 40% must be used to buy an annuity, which is taxable as pension income.
Pension Exemptions & Deductions
| Type of Pension | Tax Treatment |
| Government Pension (Uncommuted) | Fully Taxable |
| Government Pension (Commuted) | Fully Exempt |
| Private Pension (Uncommuted) | Fully Taxable |
| Private Pension (Commuted, with gratuity) | 1/3rd Exempt, Rest Taxable |
| Private Pension (Commuted, without gratuity) | 1/2 Exempt, Rest Taxable |
| Family Pension | Taxable under “Other Sources” (₹15,000 or 1/3rd deduction available) |
Important Points to Note
- Standard Deduction of ₹50,000 (India): Pensioners can claim this deduction just like salaried individuals.
- Senior Citizen Benefits: Higher exemption limits and additional deductions are available for pensioners above 60 years.
- TDS on Pension: Banks deduct TDS on pension exceeding the taxable limit, but filing a return can help claim a refund.
- Pension from Foreign Countries: May be taxed in India, but DTAA relief may be available.
Would you like specific guidance based on a particular country or situation?