Income Tax for Pensioners on Pension Amount
What is Pension?
Pension is described in Section 60 and Section 11 of the Pension Act as a periodical allowance or stipend granted on account of past service, particular merits, etc.It involves three essential features, firstly, pension is a compensation for the past service, secondly, it owes its relationship to a past employer-employee relationship or master servant relationship. Lastly, it is paid on the basis of earlier relationship or agreement of services as opposed to an agreement for ongoing service.
Pension received from a former employer is taxable as salary. As such the relevant provisions of TDS as specified in Section 192 and other relevant provisions are also applicable to pension income and tax is deductible on the same, as in the case of payment of salary.
How the Income Tax is collected on Pension Amount?
As already seen, TDS is the best medium of collecting income tax from the citizens without much of hassles, as the responsibility to deduct tax is not on the government, but on citizen-payers. Tax department accords a lot of importance to TDS as a source of generating revenue and to administering the TDS provisions more vigorously. That is why several different payments and all persons making such payments have been covered within the ambit of TDS provisions and the scope for the same is being increased day after day.
After the implementation of Sixth Pay Commission recommendations, substantial arrears were paid to the pensioners through nationalized banks. Because of this several pensioners who were earlier receiving pension amount less than Annual Income Exemption Limit may now be subjected to tax during this year as well as in future years due to increase in the monthly pension amounts. While conducting concurrent audit of banks, the issue of applicability of TDS provisions on such pension payments seems to have come up for consideration.
This article is an effort to make the reader understand the TDS provisions on pension payment, its applicability & implications.
How the Taxation on Pension does get implemented?
Before we discuss the TDS provisions applicability on the pension payments, it is pertinent to discuss the scheme of taxation for the pension. The provisions for taxation of Pension under the Income Tax Act, 1961 may be summarized as explained underneath.
The common use of the term pension is to describe the payments a person receives upon retirement, usually under pre-determined legal and / or contractual terms.
Exemptions available, if any
Yes. The Section 10(18)(i) Stipulates that Pension amounts received by any individual who is in receipt of Param Vir Chakra, Maha Vir Chakra or other gallantry awards from Central or State Government are fully exempt from Income Tax.
Except for above mentioned exemption, pension amount is taxable in all cases. It is taxable under Income from Salary as Section 17(1) (ii) defines salary to include pension as well.
Special Exemption Category
Pension to officials of UNO is exempt from taxation. Section 2 of the UN (Privilege & Immunities) Act, 1947 grants tax exemption to salaries / emoluments paid by U.N. The Karnataka High Court had held that u/s 17 of the Indian Income Tax Act, salary has been defined as including pension, and therefore, if salary received from UN is exempt, so shall be the pension. This decision was accepted by the CBDT, and is in force. This also makes it clear that employees of UN are exempt from Income Tax on Salaries too.
Commutation of Pension
commutation of Pension means payment of lump sum amount in lieu of a portion of pension surrendered voluntarily by the pensioner based on duration of period in relation to the age.
Exemptions – Under Sections 10(10A) (i) (ii) and (iii)
(i) Commutation of pension under Civil Pensions (Commutation) Rules or under any other scheme for Central, State or Local Authority employees
(ii) For employees of nongovernmental employers, 1/3rd or ½ of full value of pension is exempt depending upon the fact whether gratuity has also been paid to such person or not.
(iii) Commutation of pension from fund under section 10(23AAB)
Excess amount received, if any, over and above the limits specified u/s 10(10A) above is taxable under the head Income from Salary.
From the above it is very clear that pension annuity is generally taxable while commutation of pension may be exempt from tax. Further, pension annuity is taxed under “Income from Salary”. Thus, question of TDS will arise only in respect of taxable pensions & not on exempt pension income for obvious reasons.
With this, let us move now move on to discuss the TDS applicability.
TDS provisions on Pension
Chapter XVII-B of The Income Tax Act, 1961 contains the provisions relating to Tax Deduction at source (TDS). The very first section, i.e. Section 192 is TDS on Salary. Since we have already mentioned that Pension annuity is taxed under Income from salary, let us study this section to find whether it covers pension as well.
Section 192 (1) of the Income Tax Act states that – “Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.”
As it is clearly stated in the above Section of Indian Income Tax, one can easily understand that the section applies to any income chargeable under the head “Salaries”. Annuity pension as discussed above is covered by the definition of salary u/s 17 (1) (ii), so the TDS provisions u/s 192 are applicable to Annuity pension payments as well.
Moving ahead from here, you may kindly note that the section vests the responsibility on “Any person responsible for paying any income chargeable under the head “Salaries”. The wordings clearly indicates that it is the “person responsible for paying” who has to comply with the TDS provisions & thus such person may not always be the past employer. It implies that the banks, which disburse the pension amount, are also under the ambit. This was clearly indicated by us in the fourth para of this article.
In this connection, Section 204(i) is relevant which defines “person responsible for paying”. It states that “person responsible for paying” in the case of payments of income chargeable under the head “Salaries”, other than payments by the Central Government or the Government of a State, the employer himself or, if the employer is a company, the company itself, including the principal officer thereof.
By now It is clear that it is the past employer who may be the “person responsible for payment’ in case of non-government pensioners, while as far as Central and State Govt. pensioners are concerned it is the nationalized banks which have been entrusted with the task of payment of pension which are considered as person responsible for payment.
In cases where companies have entered into contract with the Insurance companies (called as superannuation plans) for payment of pension, then such Insurance Company will become the person responsible for payment and has to comply with the TDS provisions.
Implication of TDS on Pension Annuity – (for pensioners)
Having understood that Pension Annuity is subjected to TDS u/s 192(1), by past employer or Insurance companies, as the case may be for non-govt. pensioners and nationalized banks in case of govt. pensioners, let us now discuss its applicability and implementation methods.
When TDS will be applicable on Annuity Pension?
When the pension annuity (Annuity as a terminology is used by the Indian Income Tax Authorities. For simple understanding, it is nothing but Annualized amount of the monthly pension) for the year exceeds the maximum exemption limit for the relevant financial year. (e.g. – In case of men below 65 years Rs. 1.60 Lacs, women below 65 years Rs. 1.90 Lacs & Senior Citizens – Rs. 2.40 Lacs for F.Y. 2009-2010) (Incidentally it is also the Income Tax Exemption Limit for Financial Year 2009 -2010. You may read about it in detail from this Article).
While working employees submit the proofs of investments u/s 80 C, 80 D etc. to their employers to reduce / avoid TDS, can pensioners also submit the same to “person responsible for payment” which includes nationalized banks as well?
Yes off course. How there can be partiality or selective treatment between existing employees vis-à-vis retired persons? The procedure to be followed once Section 192 is applicable will be the same irrespective of the fact whether it is salary or it is pension. CBDT generally issues circular every year explaining procedure to be followed & compliances to be done u/s 192 of the Income Tax Act, which states that pensioners can submit such proofs to person responsible for payment including to the banks.
Can a pensioner submit the Form 15G / 15 H or other declaration for non-deduction of TDS from pension payments?
No. The reason is, the declarations with form 15G / 15H etc. are prescribed by section 197A of The Income Tax Act, 1961 but it is does not cover TDS u/s 192. So where pension / arrears exceed the maximum exemption limit after permissible chapter VI A deductions & / or Relief u/s 89, banks & other persons responsible for payment are duty bound to deduct tax at source.
After deduction of Tax at source from payment, pensioners are expected to receive TDS certificate in which from – whether Form 16 or Form 16 A?
Yes. Once tax has been deducted under section 192 of the Income-tax Act, 1961, the tax-deductor is bound by section 203 to issue the certificate of tax deducted in Form 16. No employee-employer relationship is necessary for this purpose, and secondly the certificate in Form No. 16 cannot be denied on the ground that the tax deductor is unaware of the payees other income.
Conclusions for Pensioners on Income Tax
- Income from Pension Annuity is covered by TDS provisions u/s 192.
- There is no TDS provision for payment of family pension.
- Banks paying pension on behalf of govt. is the person responsible for payment & hence is liable to comply with the TDS provisions & will be penalized in case of default. In case of pension amounts received by non-governmental persons, the company is responsible for TDS, failing which penalty as well as penal interest would be levied on them.
- Pensioners can submit proofs for deduction u/s 80C, 80 D etc, & even entitled to relief u/s 89 (in case of arrears) to avoid TDS & are entitled to receive Form 16 from banks in case of tax deduction.
- There is no provision to give declarations by pensioners like 15 G /H to avoid TDS.