As per the Income Tax Act 1961, pension is also considered as a source of income and thus becomes taxable as per the taxpayer’s respective tax slabs.
Investing for the retirement phase is a crucial aspect of financial planning. Considering the rising inflation levels and limited social security options for senior citizens, many have emphasised planning their retirement early. No one wants to depend on others and enter into a retirement life without a steady income. Most people rely on their pension after retirement. It is a guaranteed income that individuals receive on a monthly basis. This not only helps them to cover their necessary expenses but also allows them to remain financially independent.
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Though pension is the only source of income and the amount could be much lesser than your regular salary during employment years it attracts Income Tax. It’s important to consider the taxation part in your financial planning for retirement.
Income Tax on pension
No matter what the source of their pension is, just like our regular earnings, pension is also subject to taxation under the head of ‘Income from Salary’. As per the Income Tax Act 1961, pension is also considered as a source of income and thus becomes taxable as per the taxpayer’s respective tax slabs. If the pension is received from the government or from life insurance companies, then it is taxed under the head of ‘Income from Other Sources’.
Consequently, senior citizens will need to declare their income from their pension in ITR and pay taxes as applicable.
Scroll down to understand how different pension income is treated under the tax slabs.
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Pension under different tax slabs
While government or private sector pension is fully taxable under the head of ‘Salary’, family pension which is received by the legal heir of the deceased pensioner is taxable under the head of ‘Income from other sources.
On the other hand, while uncommuted pensions are fully taxable, a commuted pension of a government employee is completely exempted from the tax and for a non-government employee, it is partially exempted.
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Tax benefits for pensioners
Senior citizens are also given certain tax reliefs as per their age and upon meeting certain criteria. For example, senior citizens above the age of 75 are exempted from filing ITR under Section 194P of the Income Tax Act, 1961, under certain conditions. This is considered on the grounds of pension being their only source of income and the old age. A few deductions under Sections 80C, 80DDB, 80 TTB, and 80D are allowed for senior citizens.
