Non-Government Employees Receiving Commuted Pension – Tax Treatment

 

Non-Government Employees Receiving Commuted Pension – Tax Treatment

🧾 What is Commuted Pension?

A commuted pension is a lump sum amount paid to an employee upon retirement in exchange for a portion of their monthly pension. The employee gives up part or all of the periodic pension for an immediate one-time payment.

👥 Who are Non-Government Employees?

Non-government employees include:

  • Private sector employees

  • Employees of public sector undertakings (PSUs)

  • Employees of autonomous bodies (not considered "government" under service rules)

🔍 Relevant Provisions:

  • Section 10(10A): Provides exemption for commuted pension

  • Section 192(2A): Guides how TDS is to be deducted for such pension payments

🧮 Exemption Rules under Section 10(10A):

Employee TypeGratuity Received?Exemption on Commuted Pension
Govt employeeIrrelevantFully Exempt
Non-govt employeeReceives gratuity1/3rd of full pension exempt
Non-govt employeeDoes NOT receive gratuity1/2 of full pension exempt

🔁 "Full pension" here means the commuted value of the entire pension the person would have otherwise received periodically.

📌 Example:

Let’s assume:

  • Mr. Kumar, a private sector retiree

  • Full pension entitled = ₹30,000/month

  • He commutes and receives ₹9,00,000 (representing full pension)

  • He received gratuity

Exemption under 10(10A):

  • 1/3rd of ₹9,00,000 = ₹3,00,000 → Exempt

  • ₹6,00,000 → Taxable

➡️ TDS under Section 192(2A) applies only to ₹6,00,000

📝 Points to Note:

  • Uncommuted (monthly) pension is taxable as salary.

  • Commuted pension exemption must be calculated correctly before deducting TDS.

  • The exemption under 10(10A) is not available to family pensioners – family pension is taxable under “Income from Other Sources”.

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