1. Employee received Gratuity and
2. Employee not received gratuity.
1. Facts of the Case
An employee has retired from service and his pension has been fixed at ₹3,000 per month. He opted to commute ₹2,500 out of this monthly pension and received a lump sum amount of ₹2,00,000 as the commuted value of his pension.
There are two situations to consider:
- The employee received gratuity.
- The employee did not receive gratuity.
The objective is to compute the taxable and exempt portions of the commuted pension under both scenarios.
2. Issues in the Case [Questions]
- What is the tax treatment of the commuted pension amount received by a retired employee?
- Does the receipt of gratuity affect the taxability of the commuted pension?
- How should the exempt portion be calculated under both conditions?
- What is the final tax liability in each case?
3. Legal Principles Covered
Under Section 10(10A) of the Income Tax Act, 1961, commuted pension is exempt from tax to the following extent:
- For Government Employees: The entire commuted pension is fully exempt from tax regardless of whether gratuity is received or not.
- For Non-Government Employees:
- If the employee receives gratuity, then only 1/3rd of the commuted pension is exempt.
- If the employee does not receive gratuity, then 1/2 of the commuted pension is exempt.
Uncommuted pension (i.e., regular monthly pension) is always fully taxable under the head “Salaries”.
Calculation Basis:
- Monthly Pension = ₹3,000
- Commuted Portion = ₹2,500
- Commuted Value Received = ₹2,00,000
To calculate full value of commuted pension, assume the ₹2,500/month was given up permanently for the lump sum. The total commuted pension value is ₹2,00,000.
4. Possible Judgement / Tax Computation
Case 1: Employee Received Gratuity
- Exempt: 1/3 of the full commuted value = 1/3 × ₹2,00,000 = ₹66,667
- Taxable: ₹2,00,000 – ₹66,667 = ₹1,33,333
Case 2: Employee Did Not Receive Gratuity
- Exempt: 1/2 of the full commuted value = 1/2 × ₹2,00,000 = ₹1,00,000
- Taxable: ₹2,00,000 – ₹1,00,000 = ₹1,00,000
Regular Pension Taxability (in both cases):
- ₹500/month (uncommuted portion of ₹3,000 – ₹2,500) × 12 = ₹6,000 → Fully Taxable
Final Advice / Summary
| Particulars | If Gratuity Received | If Gratuity Not Received |
|---|---|---|
| Commuted Pension Received | ₹2,00,000 | ₹2,00,000 |
| Exempt Portion | ₹66,667 | ₹1,00,000 |
| Taxable Portion | ₹1,33,333 | ₹1,00,000 |
| Taxable Regular Pension | ₹6,000 | ₹6,000 |
Hence, in both cases, part of the commuted pension is taxable, and it is important to claim the exemption under Section 10(10A) accurately in the Income Tax Return (ITR).
