Pension is a payment made by the employer after the retirement/death of the employee as a reward for past service.
Pension is normally paid as a periodical payment on monthly basis but certain employers may also allow an employee to forgo a portion of the pension and receive a lump sum amount by surrendering such portion of pension. This is known as commutation of pension. The pension may be fully or partly commuted i.e. in lieu of pension, a lump sum payment is made to the employee. The treatment of these two kinds of pension is as under :-
- Uncommuted pension i.e. the periodical pension :- It is fully taxable in the hands of all employees whether government or non-government.
- Commuted pension:- Exemption in the case of Government employees or employees of local authorities or statutory corporation [Section 10(10A)(i)]; Commuted pension received by these employees under the Civil Pensions (Commutation) rules of the Central government or under any similar scheme applicable, is wholly exempt under section 10(10A)(i). Hence nothing is included in the gross salary under section 17(1). Normally, as per government rules full pension cannot be commuted. Exemption shall be to the extent it is allowed to the commuted and the balance uncommuted pension received periodically will be fully taxable.
Judges of the Supreme Court and High Court will be entitled to the exemption of the commuted portion u/s 10(10A)(i) of the Act. [Circular No. 623 dated 6.1.1992]
Circular : No. 623, dated 6-1-1992.
Commutation of pension received by Judges of the Supreme Court and High Courts
1. Under section 10(10A)(i) of the Income-tax Act, 1961 any payment in commutation of pension received, inter alia, under the Civil Pension (Commutation) Rules of the Central Government, shall not be included while computing the total income of the recipient.
2. The issue regarding the applicability of section 10(10A)(i) to the computation of pension received by Judges of the Supreme Court and the High Courts has been considered by the Board. The Board have been advised that under section 19 of the High Court Judges (Conditions of Services) Act, 1954 and the corresponding provisions in the Supreme Court Judges (Conditions of Service) Act, 1958, the Civil Pension (Commutation) Rules for the time being in force shall, with necessary modifications, apply to Judges. The Board are further advised that the Judges would be governed by Rule 3 of the Civil Pension (Commutation) Rules, which provide for commutation for a lump sum portion not exceeding one-half of the pension. Since the commutation is under the aforesaid Rules, Judges of the Supreme Court and High Courts will be entitled to the exemption of the commuted portion under section 10(10A)(i) of the Act.