Pension income receives different tax treatment based on the recipient's status, creating distinct deduction eligibility. According to tax rules, pension received by a retired employee is taxed under the head 'Salaries', while family pension received by legal heirs after the employee's death is taxed under 'Income from Other Sources'. This classification directly impacts the deductions available to each category of pension recipients.
The standard deduction is available only when pension is taxed under 'Salaries', providing specific benefits under different tax regimes. As reported by tax experts, ₹50,000 under the old tax regime and ₹75,000 under the new tax regime are the standard deduction amounts available for pension recipients. Since family pension falls under 'Income from Other Sources', it does not qualify for this automatic deduction benefit.
The tax treatment varies based on the pension payment structure and timing. Uncommuted pension received at regular intervals (monthly) is taxable under 'Salaries' and treated like regular salary income. A commuted pension is calculated as Age factor × Commutation % × 12 × Basic Pay and is exempt under section 10(10A) within prescribed limits. For commuted pension, one-third exemption applies if gratuity is received, or 50% exemption if no gratuity is received, with the balance taxable as salary.
Family pension recipients face different tax treatment with specific exemption limits. According to tax regulations, family pension received by legal heirs is taxed under 'Income from Other Sources' with exemption limits of ₹15,000 or ₹25,000 under the new tax regime, whichever is lower. The exemption is calculated as the lower of one-third of pension or ₹15,000/₹25,000, with the balance taxable as income.
Certain relief measures are available for pension recipients under specific circumstances. As reported by tax experts, relief under section 89 can be claimed for commuted value of pension or arrears received in lump sum, subject to furnishing Form No. 10E. This provision provides additional tax benefits for pension recipients who receive their benefits in lump sum payments.
