I got the following email yesterday and it got me wondering about the tax liability of pensions in India.
Please advice about taxability of 80CCC pension policy so as to pay minimum tax. My policy is maturing and it is about Rs. 3000/- per month. Thanks.
Section 80CCC deals with the deduction in your taxable income when you pay insurance premiums and is a sub-limit under Section 80C. This has nothing to do with how your pension will be taxed, and as far as the pension money itself is concerned, you can forget about 80CCC.
In fact, there is no pension that’s tax free at all. If you get a pension from the government, private sector or through an insurance policy, that should be included as part of your income, and will be taxed based on your slab.
Even if you moved to another country and draw a pension in India – that will be taxed in India based on your tax slab.Â
The only exception to this is when you get some part of your pension commuted. Commuted pension means that instead of drawing a monthly amount, you get a lumpsum at the time of retirement. You may commute some or all of your pension and you will be taxed according to two different set of rules. The un-commuted amount will be taxed based on your slab, and then the commuted part will be taxed based on where you were working.
If you were a government employee, then all of your commuted pension is tax free, but if you were not then there are certain rules that tell you how much you will be taxed on them. The CA Club has an excellent post on the taxability of pensions in India, and you can refer to that if you’re looking for details.
In order to reduce your tax liability you will have to make some tax deductible investments, as pension itself is taxable, and other than commuting it – you can do nothing to avoid the tax liability on it.