Question 2 (b)

Tax treatment of commuted pension, with an illustration (as set, 1961 Act, AY 2018-19)

3 marks

Time to write: About 6 minutes

From an older CBCS paper

Question

Question 2 (b) · 3 marks

Ilustrate the provisions of the income tax act that relate to the tax treatment of commuted pension. 3

Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2018-19 (previous year 2017-18), with the dates as printed. The misprint "Ilustrate" stands as printed.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

6 minfor 3 marks

Write it in this order

1 Uncommuted and commuted pension ½ mark 1 min
2 Government and other employees one-third / one-half 1½ marks 3 min
3 Illustration 1 mark 2 min

123

Short on time? Step 2 carries 1½ of the 3 marks: guard its minutes.

Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Uncommuted and commuted pension

Pension is part of salary (section 17(1)(ii)). Pension received periodically (uncommuted pension) is fully taxable as salary, for every kind of employee. Commuted pension is a lump sum received in place of part (or all) of the future pension; its exemption is governed by section 10(10A).

Government employees

Commuted pension received by an employee of the Central or a State Government, a local authority or a statutory corporation (and members of the civil, defence and all-India services) is exempt in full (section 10(10A)(i)).

Other employees

For any other employee, commuted pension under the employer's scheme is exempt only up to (section 10(10A)(ii)):

one-third of the commuted value of the full pension, where the employee also receives gratuity; or
one-half of the commuted value of the full pension, where he receives no gratuity.

The excess is taxable as salary. The commuted value of the full pension is found by grossing up the amount received for the fraction commuted. That value is the one fixed with regard to the employee's age, state of health, the rate of interest and the officially recognised mortality tables (section 10(10A)(ii)). Commuted pension received from a pension fund set up by the Life Insurance Corporation or another insurer under section 10(23AAB) is exempt in full (section 10(10A)(iii)).

Illustration (our own figures)

A retired manager of a private company, entitled to a pension of ₹12,000 a month, commutes 60% of it on 1 July 2017 and receives ₹4,32,000; he also receives gratuity.

Commuted value of the full pension: ₹4,32,000 × 100/60 = ₹7,20,000.
Exempt: one-third of ₹7,20,000 = ₹2,40,000. Taxable commuted pension: ₹4,32,000 − ₹2,40,000 = ₹1,92,000.
Uncommuted pension, 40% of ₹12,000 = ₹4,800 a month for July 2017 to March 2018 (9 months) = ₹43,200, fully taxable.
Had he received no gratuity, one-half (₹3,60,000) would be exempt and ₹72,000 taxable. As a Government employee he would pay no tax on the ₹4,32,000.

Where the 3 marks sit

#	Component	Marks
1	Uncommuted and commuted pension	0.5
2	Government and other employees (one-third / one-half)	1.5
3	Illustration	1
	Total	3

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