INCOME TAX PROVISIONS RELATED TO PENSIONERS AND SENIOR CITIZENS
1. PENSIONPension is described in section 60 of the CPC and section 11 of the Pension Act as a periodical allowance or stipend granted on account of past service, particular merits etc. Thus monthly allowance to the younger brother of a ruler was treated as a maintenance allowance and not pension (Raj Kumar Bikram Bahadur Singh Vs. CIT 75 ITR 227(MP)).
There are three important features of ‘pension’.
(i) Pension is a compensation for past service.
(ii) It owes its origin to a past employer-employee or master-servant relationship.
(iii) It is paid on the basis of earlier relationship of an agreement of service as opposed to an agreement for service. This relationship terminates only on the death of the concerned employee.
Pension received from a former employer is taxable as ‘Salary’. Hence, the various deductions available on salary income, including relief u/s 89(1) for the arrears of pension received would be granted to pensioners who received their pension from, a nationalized bank and in other cases their present Drawing & Disbursing Officers. Similarly, deductions from the amount of pension of standard deduction and adjustment of tax rebate u/s 88 and 88B shall be done by the concerned bank, at the time of deduction of tax at source from the pension, on furnishing of relevant details by the pensioner. Instructions in above regard were issued by R.B.I. ’s Pension Circular (Central Service No. 7/C D.R./ 1992(Ref. No. DGBA:GA(NBS) No. 60/GA64-(II CVL-91-92 dated 27.4.92).
Pension to officials of UNO is exempt from taxation. Section 2 of the UN (Privilege & Immunities) Act, 1947 grants tax exemption to salaries/emoluments paid by U.N. The Karnataka High Court had held that u/s 17 of the Income Tax Act, salary has been defined as including pension, therefore, if salary received from U.N. is exempt, so shall be the pension. This decision was accepted by the CBDT vide circular No. 293 dated 10.02.1981.
Family pension is defined in Section 57 as a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of death.
Pension and family pension are qualitatively different. The former is paid during the lifetime of the employee while the latter is paid on his death to surviving family members. However, in case of family pension, since there is no employer-employee relationship between the payer and the payee, therefore, it is taxed as ‘Income from Other Sources’ in the hands of the nominee(s). In respect of family pension, deduction u/s 57(iia) of Rs. 15000 or 1/3rd of the amount received, whichever is less, is available.
Under the Income Tax Act, a senior citizen is a person who at any time during the previous year has attained the age of 65 years or more. There are certain benefits available to senior citizen under the Income Tax Act:-
(i) The maximum amount not chargeable to tax in respect of senior citizens has been increased to Rs.2,40,000 w.e.f. A.Y. 2010-11. Thus, no tax is payable by a senior citizen if the total income is upto Rs.2.4 lacs for the A.Y. 2010-11.
(ii) Benefits provided by Finance Act 2007: The deduction available u/s 80D for medical insurance premium paid is to be increased to Rs.20,000 for senior citizens. Secondly, the deduction available u/s 80DDB in respect of expenditure incurred on treatment of specified diseases is to be increased to Rs.60,000 for senior citizens.
TAXABILITY OF RETIREMENT BENEFITS
On retirement, an employee normally receives certain retirement benefits. Such benefits are taxable under the head ‘Salaries’ as “profits in lieu of Salaries” as provided in section 17(3). However, in respect of some of them, exemption from taxation is granted u/s 10 of the Income Tax Act, either wholly or partly. These exemptions are described below:-
1. GRATUITY (Sec. 10(10)):
(i) Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt.
(ii) Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:-
(a) For every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned employee.
(b) The amount of gratuity as calculated above shall not exceed Rs 10 Lakh.
(iii) In case of any other employee, gratuity received shall be exempt subject to the following limits:-
(b) Rs. 10 Lakhs whichever is less.
Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 10 Lakhs.
As per Board’s letter F.No. 194/6/73-IT(A-1) dated 19.6.73, exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will quality for relief u/s 89(1).
Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax(Circular No. 573 dated 2 1.8.90). 2. COMMUTATION OF PENSION (SECTION 10(10A)):
(i) In case of employees of Central & State Govt. Local Authority, Defence Services and Corporation established under Central or State Acts, the entire commuted value of pension is exempt.
(ii) In case of any other employee, if the employee receives gratuity, the commuted value of 1/3 of the pension is exempt, otherwise, the commuted value of Y2 of the pension is exempt.
Judges of S.C. & H.C. shall be entitled to exemption of commuted value upto Y2 of the pension (Circular No. 623 dated 6.1.1992).
(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) if applicable may be claimed for the same.
(ii) Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.
(iii) In case of other employees, the exemption is to be limited to the least of following:
(a) Cash equivalent of unutilized earned leave (earned leave entitlement can not exceed 30 days for every year of actual service)
(b) 10 months average salary
(c) Leave encashment actually received. This is further subject to a limit of Rs.3,00,000 for retirements after 02.04.1998.
(iv) Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.
For the purpose of Section 10(10AA), the term ‘Superannuation or otherwise’ covers resignation (CIT Vs. R.V. Shahney 159 ITR 1 60(Madras).
Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947 or any other Act or Rules is exempt subject to following limits:-
(i) Compensation calculated @ fifteen days average pay for every completed year of continuous service or part thereof in excess of 6 months.
(ii) The above is further subject to an overall limit of Rs.5,00,000 for retrenchment on or after 1.1.1997 (Notification No. 10969 dated 25.6.99).
Any payment received from a Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. Any payment from any other provident fund notified by the Central Govt. is also exempt. The Public Provident Fund(PPF) established under the PPF Scheme, 1968 has been notified for this purpose. Besides the above, the accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund is also exempt to the extent provided in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act.
Payment from an Approved Superannuation Fund will be exempt provided the payment is made in the circumstances specified in the section viz. death, retirement and incapacitation.
7. COMPENSATION ON VOLUNTARY RETIREMENT OR ‘GOLDEN HANDSHAKE’ (Sec. 10(10C)):
(i) Payment received by an employee of the following at the time of voluntary retirement, or termination of service is exempt to the extent of Rs. 5 Lakh:
(a) Public Sector Company.
(b) Any other company.
(c) Authority established under State, Central or Provincial Act.
(d) Local Authority.
(e) Co-operative Societies, Universities, IITs and Notified Institutes of Management.
(f) Any State Government or the Central Government.
(ii) The voluntary retirement Scheme under which the payment is being made must be framed in accordance with the guidelines prescribed in Rule 2BA of Income Tax Rules. In case of a company other than a public sector company and a co-operative society, such scheme must be approved by the Chief Commissioner/Director General of Income-tax. However, such approval is not necessary from A.Y. 2001- 2002 onwards.
(iii) Where exemption has been allowed under above section for any assessment year, no exemption shall be allowed in relation to any other assessment year. Further, where any relief u/s 89 for any assessment year in respect of any amount received or receivable or voluntary retirement or termination of service has been allowed, no exemption under this clause shall be allowed for any assessment year.
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