Pension from employer, annuity income received from life insurance companies are taxed differently

There are various sources from which a person gets a pension. Let us discuss the income tax provisions about taxation of pension and annuity in the hands of the recipient.

Various sources of pension

For those who have joined the government service prior to 1st January 2004 are eligible for pension and those who joined after 1st January 2004 will not get any fixed pension from the government as they have been shifted to the New Pension System (NPS). Under NPS, they will get periodic payments from annuity purchased with the corpus accumulated in their NPS account.

Likewise, the employees of private sector who are members of provident fund scheme and who have completed 10 years in private sector also get pension. Some employees get pension from life insurance companies in respect of the superannuation policy purchased by their employer. Likewise, self-employed individuals who have been contributing to NPS will also get an annuity from an insurance company after their retirement.

The words pension and annuity are loosely and interchangeably used but strictly speaking, the monthly amount received, after retirement, from an ex-employer or in connection with employment is pension. Whereas any periodical payment received from an insurance company is termed as annuity. Pension and annuity both are taxable as regular income. However, the head under which it gets taxed will depend on the ultimate source of such payments.

Pension from ex-employer/provident office
Any pension received from your ex-employer is taxable under the head “Salaries”. So one can claim the standard deduction of upto fifty thousand against his pension income like a salaried person.

Employees who are entitled to receive pension can commute certain portion of their pension amount and get the lump sum present value of such commuted portion of pension at the time of retirement. Full value of commuted pension is tax-free for all the government employees as well as for those working in government companies but for other employees, the exemption is available for only 1/3 portion of their pension commuted in case the employee gets gratuity at the time of retirement. In case you are not entitled to any gratuity, half of the commuted pension can be claimed as exempt.

The pension received under Employee Pension Scheme (EPS) for provident fund contribution is fully taxable under the head “Salaries”. The pension under EPS is also eligible for the standard deduction.

Pension under superannuation policy
In case your employer has contributed towards superannuation fund or has purchased superannuation policy for you, you are entitled to receive pension from life insurance company after your retirement. Like direct pension from your employer, 1/3 of commuted pension, in this case, is also tax-free. The pension from insurance company in respect of superannuation is also taxable under the head “Salaries” and entitles you for the standard deduction.

Family pension
Pension received by dependent family members after death of the employee/ex-employee is called family pension and is taxable under the head “Income from other sources” as there is no employee and employer relationship. In respect of family pension the recipients are entitled to claim a deduction equal to 1/3 of the pension subject to a maximum of fifteen thousand rupees in a year.

Tax on annuity from insurance company
In case you have bought an annuity plan from an insurance company, the amount of such annuity is fully taxable under the head “Income from other sources.” Since this amount does not have any co-relation with any employment, no standard deduction is available against this amount.

Annuity under NPS account
The salaried who have opted for NPS instead of the Employee Provident Fund account have to mandatorily buy an annuity plan from an Indian insurance company for 40% of the accumulated corpus for which they will get an annuity. Presently, the income tax law does not have any specific provision as to under which head of income the annuity would become taxable.

Logically speaking such annuity should be taxed under the head “Salaries” but as the employee can continue to contribute to his NPS account even after he leaves the employment, it is doubtful whether the annuity received, in such a situation should be taxed under the head “Salaries” or under the head “Income from other sources”. Likewise, self-employed taxpayers can also contribute towards the NPS. Since salaried and self-employed themselves can contribute fifty thousand rupees, additionally, under Section 80 CCD(1B), the head under which the pension received should be taxed and whether one will be entitled to claim standard deduction are grey area and a proper amendment of the law would clear the smog around the annuity under NPS.

In my opinion, for salaried the pension should be taxable under the head “Salaries” and the recipient should be entitled to the standard deduction. However, as the law is silent on this aspect it is risky to offer it under the head Salaries for claiming standard deduction.

I am sure this discussion will help you understand the taxation of pension and annuity better.

Source:https://www.timesnownews.com/business-economy/personal-finance/planning-investing/article/pension-from-employer-annuity-income-received-from-life-insurance-companies-are-taxed-differently/790949

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