Monday, November 5, 2012

Tax Implication on Pension

There are several ways in which one can receive a pension and the exact details have to be checked to see the extent of a taxable element that is involved in the entire process. The nature of the payment actually determines the extent of the income that would be taxable and based on this the required effect would have to be given to the whole process. This aspect is important as the tax will eat into the final income that is available in the hands of the individual. Here is a closer look at the entire issue and how the investor or individual can tackle the position.

Pension:One of the ways in which you can receive income in your retirement years is through the route of pension. This is a way wherein you get a regular sum of money at specific time intervals usually monthly so that there is a regular flow of income that continues after you stop working. One of the changes that occur once you retire is that the regular income flow stops. Pension is meant to be a replacement for this situation where you can ensure that there is not a large difference that is visible immediately hence this will be a way in which you can ease the entire situation. A central theme of the pension effect in the field of taxation is that the amount received as a pension is taxable though there could be a separation of the heads under which the income would go depending upon the source from which the amount has been received. Once this is known then the additional elements can be tackled properly.

Received from employer:A way in which pension arises for an individual is that there is a regular payout that is available from their former employer. This is possible due to the long service that the individual has put in with the employer or that there are several conditions related to such a regular payout of the pension that is met by the employee. The end result is that there is a regular payout that they will get in the form of pension. Since the payout received will be taxable the next question is the head in which the amount will be considered.

In this sense the source from which the payout is received becomes very important so in this case it is the former employer who is making the payout. Due to this reason the amount is actually considered under the head of income from salaries and the individual would have to include the amount of the pension that they have received under this head. This means that there are no additional deductions that would be allowed from the income and hence the manner of the taxation of the net income is also clearly determined.

Other sources:There are several other ways in which an individual can receive a pension and this would cover receipts from an insurance company or it could be some other investment where there is a promise of a regular flow of income over a period of time which will act like a pension. In these situations the manner in which the taxation impact is covered is slightly different so there has to be attention to this area. The basic nature of the income under the taxation impact remains the same which is that the amount received will be fully taxable. If there is a lumpsum received on the maturity of an insurance policy then this might be tax free but it is not pension. Usually the pension received from different sources will go under the head Income from other sources. One thing that is crucial in this whole working is that when there is a family pension that is received then there will be a standard deduction that will be applicable so this is something that will provide an element of relief but the deduction is restricted to one third of the amount or Rs 15,000 whichever is less.

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