Appuonline - Regulation

'"Pension" is a payment made by an employer to his tired or ex-employee in consideration of the services ordered by him in the past during his employment with e employer or in his organization. Webster's New ternational Dictionary defines pension as "a stated lowance or stipend made in consideration of past rvices . . .". Tomlin's Law Dictionary defines pension as .n allowance made to any one without an equivalent". 2ction 60 or the CPC and section 11 of the Pensions Act ascribe it as a periodical allowance or stipend granted not i respect of any right, privilege perquisite or office, but on ccount of past service, or particular merits etc. Thus in ne case of Raj Kumar Bikram Bahadur Singh v. CIT 75 TR 227 (MP) a monthly allowance to the younger brother f a ruler was treated as a maintenance allowance and not tension.

Three features are common to all these definitions: First pension is a compensation for past services. Secondly, it owes its origin to a past employer-employee or master-servant relationship (see Lakshminarayan Ram Gopal & Sons Ltd. v. Government of Hyderabad 25 ITR 449 (SC).

Although the employee in question may have retired from service, pension is paid on the basis of earlier relationship of an agreement of service, as opposed to an agreement for service. In such cases, the employer has as much obligation to pay as the employee has the right to receive. This relationship services only when the employee in question dies. In that event, if any family pension is payable, the basis of taxing it in the hands of the members of the family receiving the pension would be totally different as described later.

Mr. X receives an allowance of Rs. 2,000 p.m. from ABC Ltd., because he served this company as an Officer in its Material Management Department for 20 years prior to his retirement. This allowance is given to him because its payment every month formed part of the conditions of service on which he joined M/s ABC Ltd. If M/s. ABC defaults in payment, Mr. X can go to a court of law for breach of contract.
What Mr. X is paid every month is a pension. All the three tests stated earlier are satisfied: viz Mr. X is being compensated for past services; there is a clearly discernible master-servant or employer-employee relationship; lastly Mr. X has a contractual right to receive the allowance, as much as the company has a contractual obligation to pay.
Mr. Y was a contractor before he took retirement. He receives an allowance of Rs. 1000 p.m. from the Life Insurance Corporation (LIC). The LIC pays this amount because in accordance with one of the Corporation's schemes. Mr. Y paid the premia demanded of him from time to time, as a result of which the Corporation is now under an obligation to pay him Rs. 1000 p.m.
Mr. Y gets an annuity and not a pension. Although he has retired, there is no master-servant or employer-employee relationship between him and the LIC.

Section 17 of the Income-tax defines "salary" inter alia to include pension. In CIT v. Ramiah and CIT v. T. Joseph 126 ITR 638 (Kar.), it was held that pension is salary not only within the meaning assigned to the term under section 17 but also in terms of Section 18 of Article V of the Schedule to the U.N. (Privileges and Immunities) Act, 1947. It follows, ipso facto, that unless exempt, all pensions are taxable under the head "salaries". Pensions paid by the United Nations to its erstwhile employees are exempt, regardless of where they accrue, arise or are received. [CBDT Circular No. 293 dated 10.2.1981-130 ITR (St.) 5.

In the preceding illustration I, the monthly allowance of Mr. X would be taxed as pension under the head "salaries".

Pension is qualitatively different from family pension. The former arises after retirement during the life time of the employee. The latter arises only after the death of the employee. In the case of the former, the employer-employee relationship is deemed to continue till the death of the employee; in the case of the later, it stands severed on the death of the employee. Pension is taxable in the hands of the retired employee. After his death, family pension is to be taxed under the head "other sources" in the hands of each of the surviving members of his family, being named as nominee.

Mr. R a pensioner, died in January 1996. He is survived by his widow, two dependent, unmarried sons and a minor daughter. Before his retirement Mr. R had been an employee of M/s. J.K.K. Ltd., in accordance with the terms and conditions of Mr. R's employment, above mentioned members of his family are to be paid a family pension of Rs. 5,000/- p.m. (annual family pension Rs. 60,000.'-).

This amount of Rs. 60,000/- is not taxable in the hands of Mrs. R. In accordance with the contractual agreement between Mr. R and the Co., it is to be shared equally by all members of the family. As there are in all four members, each of them will be entitled to Rs. 15.000/-annually. This amount will be separately includible in the total income of Mrs. R, and her three children along with their other income, if they have any, as income from other sources. If they have no other income, the entire sum of Rs. 60,000/- as distributed to 4 family members will not attract tax being below the taxable limit in the hands of each member.

Like salary, pension is normally taxed on accrual or due basis. Again like salary, if pension has not been charged to tax in the year it was due, it may be taxed in the year of receipt.

Mr. J received a pension of Rs. 1000/- p.m. from his ex-employer, M/s. PQR Ltd. During the previous year 2000-2001 corresponding to the assessment year 2001-2002, the company withheld his pension of January, February and March, 2001 because of some dispute which the company had with him. The pension for these months was finally released in May 2001.

In this case, based on the principle of accrual, the pension for January, February and March 2000 should ordinarily have been taxed in the assessment year 2001-2002 (previous year 2000-2001). However, in this example, even if the pension for the months in question had been delayed or could not for any reason have been brought to tax during the assessment year 2001-2002, it can be brought to tax on receipt basis in a subsequent assessment year (on the facts of the instant case, in the assessment year 2002-2003).

If a person received pension/salary from more than one source, the salaries/pension from all the different sources have to be aggregated for determining income under the head "salaries".

Mrs. P. retired from Government Service on 31st March, 2000. She now works in a private library where from she gets a salary of Rs. 3000/- p.m. Her pension from the Government is Rs. 1500/- p.m.

For tax purposes, these two sources of income have to be aggregated. Her income under the head "salaries" for the assessment year 2001-2002, the previous year being 2000-2001 would be:

No tax would be leviable during 2001-2002 assessment year as the basic exemption limit for this year is Rs. 50,000/-.

Once salary income (and this includes pension) has accrued, its waiver, denial or surrender after the close of the accounting period, would not obliterate accrual or receipt of such income. On the contrary, such an act would only constitute application of taxable income.

Salary foregone before it accrues is an all together different proposition. It cannot be taxed. CIT v. Mehar Singh Sampuran Singh Chawla 90 ITR 219 (Delhi).

Likewise, the full value of salary is taxable even though it is subject to compulsory deductions or restrictions as to its application. For example, the fact that a portion of such income has mandatorily to be applied for a particular purpose either as a result of a contractual or statutory obligation would not make any difference; the full amount of such income would be brought to tax.

The only exemption to these principles is provided by the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961 which stipulates that pension surrendered to the Central Government is exempt from tax.

Prior to the assessment year 1975-76, salaried employees were granted various deductions for such expenses incurred by them as were incidental to their employment. From the assessment year 1975-76 onwards, these deductions were substituted by a single standard deduction to be allowed to the taxpayer regardless of the expenditure incidental to employment actually incurred by him. [Section 16(i)].

The Finance (No. 2) Act, 1980 amended Section 16(i) from the assessment year 1981-82 to make pension eligible for the grant of the standard deduction. The controversy as to whether such a deduction could or could not be granted in respect of pensions was thus put to rest.

For the assessment years 198/-88 and 1988-89, the rate of standard deduction was 30% of salary income or Rs. 10,000/- whichever is less. From the assessment year 1989-90, it was enhanced to 33-1/3% of salary income or Rs. 12,000/- whichever is lower. From the assessment year 1994-95, the maximum limit was raised to Rs. 15,000/-. For the assessment year 199/-98, the ceiling of Rs. 15,000/- was enhanced to Rs. 18,000/- in the case of working women whose total income (before standard deduction) did not exceed Rs. 75,000/-. Similarly in the case of an employee having salary income before standard deduction not exceeding Rs. 60,000/- standard deduction was to be equal to one third of salary or Rs. 18,000/- whichever was less.

Allowance for standard deduction has further been liberalised from the assessment year 1999-2000 by the Finance Act, 1998 as under.

Some changes concerning standard deduction have been made by the Finance Act, 2001 also. These have been mentioned in Chapter VI where other changes by this Act have been discussed.

With effect from the assessment year 1990-91, Clause (iia) in section 57 of the Income-tax Act, 1961 provides that in the case of income in the nature of family pension, a deducation of a sum equal to thirty three and one third per cent of such income or Rs. 15,000 whichever is less can be claimed as standard deducation. The sum of Rs. 15,000 was substituted for Rs. 12,000 by the Finance Act, 1997 with effect from 1.4.1998.

Explanation to this clause clarifies the meaning of the term "family pension". It has been said that "family pension" means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death.

Exemption in respect of: Section 10(10A) exempts from tax, the full commuted value of pension received by an employee of the Central or State Governments, municipal authorities or public sector undertakings.

The commuted value in such cases is determined with regard to the age of the employee, his health, rate of interest and officially recognized mortality tables.

The Central Board of Direct Taxes has accepted the principle that when a Central Government servant is permanently absorbed in a Public Sector undertaking, he is deemed to have retired in terms of Rules 37 and 37A of the Central Civil Services (Pension) Rules, 1972. As such, the entire commuted amount of pension received by such Government servant would be exempt from tax because the Civil Pensions (Commutation) Rules, which permits commutation of only part of the pension, would not be applicable in such a case as it would come within the ambit of the expression. 'Pension received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable to members of the Civil Services of the Union . . .'. These two provision thus constitute an independent, similar scheme u/s 10 (10A) distinct from the Civil Pensions (Commutation) Rules.

When a person receives arrears of pension, he is liable to be taxed in the year of receipt. He is however, entitled to relief u/s 89(1). By claiming benefit of this section, incidence of tax can be restricted to the amount which would have been payable had the income in question been taxed on accrual basis in the year in which it actually became due.

If the amounts received on retirement by way of commuted pension, gratuity, leave encashment, etc. are invested after retirement in deposit scheme for retiring Government employees, there would be no liability on income earned from such deposit. The details of the scheme are given hereinafter.

In order to widen the investment opportunities available to retired or retiring Government employees, the Government has started a deposit scheme called the Deposit Scheme for Retiring Government Employees, 1989. This was promulgated by the Government vide notification No. F.2/14/89-NS.II dated 7^th June 1989 with effect from 1^st July, 1989.

Deposit under this scheme may be made by a Government employee within three months from the date of his receiving his retirement benefits. The employee may invest the whole or part of his retirement benefits for a period of three years. The retirement benefits include the following payments:

Deposit under the scheme can be made with the State Bank of India or its subsidiaries or any other nationalized bank as may be authorized for this purpose. Minimum amount that can be deposited is Rs. 1,000/-.

A depositor may withdraw the entire balance or part thereof after the expiry of three years from the date of deposit.

The rate of interest which was earlier 10% per annum payable half yearly on 30^th June and 31^st December has now been reduced to 8.5 per cent p.a. The investment begins to earn interest from the date of deposit. Interest due but not drawn earns further interest at the above rate. Interest is totally tax free.

Premature encashment can be made after 1 year from the date of deposit but before expiry of 3 years in which case interest on amount withdraw will be payable at 4% from the date of deposit upto the date of withdrawal. Excess interest paid, if any, will be adjusted at the time of such withdrawal.

If a retired person invests Rs. 2,00,000/- on 10% interest rate (the earlier rate) in this scheme, he will be entitled to tax free interest income of Rs. 20,000/- per annum. His total income will thus remain below the taxable limit, even if he receives a pension of Rs. 6,000/-p.m. for the assessment year 2001-2002 (Rs. 72,000 minus Rs. 24,000 (being 173^rd of the pension income) Standard deducation) (Balance Rs. 48,000/-) income upto Rs. 50,000 being exempt.

On the other hand, if he deposits this amount in fixed deposits for 3 years with banks, he will be entitled to interest approximately at the rate of 10 per cent per annum, amounting to Rs. 20,000. His total income would then be as under :

Assessment year 2001-2002

		Rs.
	Salary (Pension)	72,000
	Less: Standard Deduction u/s 16(i)	24,000
		--------
		48,000


	Other sources:
	Interest from bank	20,000
		--------
	Gross total income	68,000
	Deduction u/s 80L	12,000
		--------
	TOTAL INCOME	56,000

Tax payable on a total income of Rs. 56,000 for the assessment year 2001-2002 work out to Rs. 600.

Thus, he saves Rs. 600 by investment his money under this Deposit Scheme. His investment of Rs. 2,00,000 will additionally be exempt from Wealth tax as well.

Only one account can be opened within 3 months from the date of receiving the retirement benefit in single name or jointly with the spouse. Nomination facility is available.