How is family pension reported under Income Tax

Any person who makes an earning in India, is liable to pay tax on such income. Pension is a regular periodic payment made to an individual typically following retirement from service or his dependent family members post his demise, as a way to provide financial security to them during the phase they are not working. Employer of such retired or deceased person pays pension to such person or their dependent family members.

Pension is an employee’s retirement benefit in the form of monthly income. If such income is provided to dependent family members specifically their widow or children below a certain age after an employee’s death, it is called a family pension.

What is Family Pension?

Comptroller and Auditor General of India has given an exhaustive definition of family pension which reads like –

Family pension is granted to the widow / widower and where there is no widow / widower to the children of a Government servant who entered in service in a pensionable establishment on or after 01/01/1964 but on or before 31.12.2003 or having entered service prior to that date came to be governed by the provisions of the Family Pension Scheme for Central Government Employees, 1964 if such a Government servant-

(i) dies while in service on or after 01/01/1964 or

(ii) retired/died before 31.12.1963 or

(iii) retires on or after 01/01/1964

and at the time of his death was in receipt of pension.

Taxation of Family Pension:

For an employee, pension is taxable under the head “Income from salaries”. Pensions are paid out periodically every month.

However, family pensions are taxed under the head "Income From Other Sources" in the Income tax return of the dependent members of employees who receive such pension.

Section 57(iia) of the Income Tax Act, 1961 states that,

in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or fifteen thousand rupees*, whichever is less.

There are two instances where such pension is taxed.

• If this pension is commuted or is a lump sum payment, it is not taxable in certain cases.
• Uncommuted pension received by a family member is exempt to a certain extent. Rs. 15,000 or 1/3rd of the uncommuted pension received – whichever is less is exempt from tax.

*As per the latest Budget 2024 update, family Pension deduction is proposed to increase from ₹ 15,000 to ₹ 25,000.

How to report Family Pension in TaxBase software?

In the Income details window, click on the Other Sources tab. A window will open where you have to enter the income details for family pension.

Upon entering Family Pension window, the below screen will appear –

In this screen you have to enter the amount of pension received and arrears if any.

After entering these details, the deduction of Rs.15,000 (25,000* as per recent Budget update) will be automatically calculated in the software.

Conclusion:
Pension or family pension, as we have discussed is liable to taxation. However, Family pension is subject to a particular deduction as mentioned in Section 57 of the Income Tax Act, 1961. Any family pension received by the beneficiaries are to be reported under the head “Income from other sources”. Whereas the normal pension received by the employer from his employee is taxable under “Income from salaries”.