For any employee who is used to drawing a monthly salary, the thought of not having a steady income after retirement can cause sleepless nights.
The idea of making an investment today, is to ensure the availability of funds for the future. While many investment schemes are available, a pension plan is one that helps you draw a predictable, steady flow of income in the future. This makes it easier to plan expenses, and thereby preserve savings and investments over a longer term.
What is pension?
Pension is the payment received by an individual or his/her spouse on attaining the official age of retirement. In the past, it used to be the organisation’s responsibility to provide their employees with a pension.
More recently, pensions are received from a corpus that is generated with regular payments during employment years.
There are two ways in which this amount can be paid to the pensioner – either on a monthly basis or in a lump sum amount. This is also called the commuting of pension and the non-commuting of pension.
Difference between the two
If, after your retirement, you choose to withdraw a lump sum amount from your PF (Provident Fund) account and forgo the monthly payouts to the extent of your pension amount, then it is called the commuted pension. The rest of the amount is called the non-commuted pension.
This can be better explained by an example:
You can choose to get a lump sum amount immediately upon retirement to take care of initial one-time expenses. You could relocate to your home town, or invest in your retirement home. For this purpose, you could avail upfront, a percentage of your income for a number of years. Assuming you are entitled to a monthly pension of Rs 10,000, upon retirement at age 60, you can choose to take upfront 10% of your income for 15 years (Rs 1,000 per month for 15 years = Rs. 1,80,000).
Post this, the pensioner will be given 90% of their entitled pension for 15 years (Rs 9,000 per month for 15 years). After the 15-year period, the pension is restored to 100% of the entitlement, as the per-availed portion is accounted for.
Is the pension you receive taxable?
The tax calculation on a pension received is the same as that on salary for both employees in public as well as the private sectors. You can claim a standard deduction of Rs 40,000 like you could with salaried income for the current financial year 2018-19.
It is fully exempt from tax for government employees. However, for private sector employees:
If received with gratuity: One-third of the extent of complete pension (100%) that can be received is exempt from tax and the rest is taxed as salary.
Without gratuity: Half of the extent of the complete pension (100%) that can be received is exempt from tax and rest is taxed as salary.
What pension is exempt from being taxed?
Pensions that are received from the United Nations Organisation by its employees or their families are exempt from tax. Pension received by family members of the Armed Forces is also exempt.
Also, if family members receive commuted pension, it is exempt from tax.
If you wish to read more about what the pension scheme is and how you can start saving under it, do read our article here.
(Edited by Shruti Singhal)