Commutation of pension

Commutation of pension

The lump sum amount received by employee in lieu of pension which he would have otherwise received monthly is known as

commuted value of pension.

Taxability

Any payment received in commutation of pension by all categories of government employees or employees of local authority,

statutory corporation, government employee absorbed in a PSU is fully exempt from tax.

Any payment in commutation of pension received from any other employer is exempt to the extent it does not exceed:

Commuted value of 1/3rd of normal pension if he also receives gratuity;

Commuted value of ½ of normal pension in other cases.

 

Computation

Step 1: computation of value of full pension

Step 2: calculating 1/3 or ½ of full pension as the case may be.

The amount computed under step 2 will be the exempted amount

Step 3: deduct amount computed under step 2 from the commuted value of pension

Step 4: balance amount under step 3 will be the taxable portion of commuted pension.

 

sample;

Q: Mr.Alok is entitled to get a pension of rs 10,000 PM from a company. He get 3/5th pension computed and received rs 7, 65,000.

calculate taxable portion of commuted value, if:

  1. He receives a gratuity
  2. He did not receive gratuity

A:

1. if alok receives gratuity;

Commuted value of 3/5th pension                              7, 65,000 
Commuted value of full pension (7, 65,000X5/3) 12, 75,000 
Exempted amount (12, 75,000X1/3) 4,25,000
Taxable portion of commuted pension(7, 65,000-4, 25,000)                                                  340000 

 

 

 

 

2. if alok does not receives gratuity;

Commuted value of 3/5th pension                               7, 65,000 
Commuted value of full pension (7, 65,000X5/3) 12, 75,000
Exempted amount (12, 75,000X1/2)                         6, 37,500
Taxable portion of commuted pension(7, 65,000-6, 37,500)                                                    1, 27,500

 

 

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