Do you know that you can save tax on your pension?
Lets learn this tax saving through an example
Assume you have retired from your job this year and is getting a pension of 10000 per month. But you want to save tax on this money right?
What is commuted pension?
Commuted pension is a part of your total pension taken in advance from your employer for sudden expenditure purposes.
Sec 10(10A) of the Income tax act states that commuted pension is exempt
- fully if you are government employee
- partly depending on certain conditions if you are a private employee
How much is exempt for private employees?
It depends on if you were paid gratuity or not at the time of your retirement.
- If you get gratuity then one third of your total pension receivable will be exempt.
- If you did not receive any gratuity then half of the total pension receivable will be exempt
Total pension receivable herein means the pension that would have been receivable had you commuted your whole pension.
Coming back to the example, say you commute 40% of your total pension receivable and receive an amount of Rs 3 lakhs.
If you are a government employee, your entire 3 lakhs would be exempt from tax.
If you are a private employee and received gratuity, amount exempted from tax would be:
One third of total pension receivable that is 1/3 of 7.5 lakhs which is Rs 2.5 lakhs. So out of Rs 3 lakhs commuted, your Rs 2.5 lakhs is tax free.
If you are a private employee and did not receive gratuity, half of Rs 7.5 lakhs would be exempt which means Rs 3.75 lakhs. Out of Rs 3 lakhs, again your entire amount will be exempted as 3.75>3 lakhs.
But keep in mind that your uncommuted pension is always taxable. Therefore it is better to commute and save tax on your pension.
A common question arises if you claim exemption for commuted pension, can you claim standard deduction?
Yes, standard deduction is available for all salaried employees and -pensioners. This year the standard deduction had been increased to Rs 50000 from the latest Rs 40000 providing you greater relief.
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