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:
- He receives a gratuity
- 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 |