When an employee retires from service he gets pension from the company.

The employee receives a certain amount from his employer every month. This is known as Uncommuted pension. That is pension received in installments. This is fully taxable.

However certain employees may wish to take a lumpsum amount. So they ask their employer to give a certain percent of their pension in advance. E.g 50 %. This is known as commuted pension. There are certain tax rules associated with it.

Note: The Provident Fund Scheme also has a pension scheme attached to it. For Govt Employee : Pension is fully exempt from tax

E.g

Mr ABC retired on 30-June-2013. From 01-Jul-13 , he receives a monthly pension of Rs 12000/-.

On 31 Jan 2014, he commutes 30 % of his pension and receives Rs 500000/- from his employer.

So as he commuted 30 % of his pension, from Feb 2014 onwards he will receive only (70%) : Rs 8400/- as pension.

The taxability rules for commuted pension depends if the employee has received Gratuity or Not.

Below is the tax treatment for Pension.

Continuing above example

Receives Gratuity: 1/3 of 100% Commuted Pension is exempt

30% = Rs 500000 /-

So 100% of pension = Rs 1666666 /-

1/3 of 100% Commuted Pension = (1/3) X 1666666 = Rs 555556/-

He received Rs 500000, so entire amount is exempt from tax

Does Not Receive Gratuity: 1/2 of 100% Commuted Pension is exempt

1/2 of 100% Commuted Pension = (1/2) X 1666666 = Rs 833333/-

He received Rs 500000, so entire amount is exempt from tax