How Is Pension Income Taxed? 3 Things To Know To Reduce Liability

The pension income is taxed in India based on the uncommuted or commuted pension, so the tax application varies accordingly. A clear understanding of tax rules can help you reduce tax deducted at source. So, let’s understand the terms uncommuted and commuted pension. 

1. Uncommuted Pension (Regular Pension)  
An uncommuted pension from an employer is considered for tax under the head “Income from salaries”, hence, TDS will apply. However, if you have other income sources, your total annual income will be taxed as per the income tax slab rates. 

2. Commuted Pension  

A commuted pension is a lump sum received instead of a regular monthly pension. This commuted pension can be either fully or partially tax-free. 

How To Reduce TDS On Pension? 

TDS will not apply if the total annual pension income does not cross the basic exemption limit—Rs 2.5 lakh for those below 60, Rs 3 lakh for senior citizens (60-79 years) and Rs 5 lakh for super senior citizens (80 and above).  

The following are ways one can avoid TDS on pension:

1. Submit Form 15H of 15G 
After deductions and exemptions, if the total income is less than the taxable limit, then you can submit form 15H if you are a senior citizen or form 15G for the rest to the bank or pension disbursing authority to ensure there is no TDS deduction. Pensioners can claim deductions under sections 80C, 80D, 80TTB, etc. All these deductions from income will reduce the TDS liability. 

2. Investments and Sec 87A Rebate
Section 87A of the Income Tax Act provides Rs. 12,500 rebate if the deductions are less than Rs 5 lakh. Hence, invest in proper tax-saving investments to make use of this rebate to the fullest. 

3. Form 10-IE for New Tax Regime 

Pensioners can choose between the old and new tax regimes—the former provides options for deductions and exemptions, while the new one offers reduced tax rates. Since the new tax regime has become a default regime, individuals can use the new Form 10 IEA to indicate their preference for the old tax regime. However, the new tax regime may make more sense if you do not have deductions and exemptions to avail of. 

Regardless of which regime you choose, knowing the taxation rules will help you reduce tax liability, save more, and better manage your finances. This process will help ensure a happy and financially secure life post-retirement. You could also consult a tax expert for help.