Know everything about commuted value of a pension

Pension plans are long-term investments specially designed for income after retirement. As a pension plan holder, you can opt for two types of payment options. Either you can choose a monthly payout or an advanced lump sum payment. This lump sum payment is calculated on the commuted value of the pension.

Extensive financial planning is essential for a long-term investment such as an annuity and it helps determine the commuted value of the pension plan. Moreover, effective financial planning helps tackle present financial requirements without affecting your future prospects. Let’s understand the commuted value of a pension plan and its important aspects. 

What is the commuted value of a pension?
 

You might have a pension plan or work for an employer that provides one. After retirement, you can opt for two types of payment options at your convenience. Depending on your requirements, you can avail yourself of a monthly payout or a lump sum payment. The commuted value of a pension allows you to withdraw a lump sum amount without hurting your future gains. 

Let us understand it with an example. At the age of 60 years, you decide to take 30% of your monthly pension (which is ₹30,000 per month) for the next five years’ worth. You will receive an amount as calculated below.

 30% of ₹30,000 X 12 X 5= ₹5,40,000

So, the lump sum amount you will receive is ₹5,40,000 as your commuted pension.

However, if you do not wish to disturb your pension plan with a lumpsum withdrawal, you can opt for a safer investment option such as a deposit scheme. An IDFC FIRST Bank Fixed Deposit is one of the highest ROI deposit accounts in the industry that offer  higher interest rates and flexible tenures of up to 10 years. In addition, senior citizens also enjoy 0.5% higher rates when compared to a normal FD. 

You can further Keep track of all your banking needs with the IDFC FIRST Banking App

Is the commuted value of the pension taxable?
 

The terms and conditions for the taxability of a commuted value pension can vary depending on the nature of your employment. For government employees, the commuted value of the pension is fully exempted from taxes.

For non-government employees, if they get a pension along with gratuity, two-thirds of the amount is taxed, while one-third of the amount is exempt from tax obligations. However, if they don’t receive gratuity along with their pension, 50% of their commuted pension is exempted from tax.

Do you need to file an ITR for commuted pension?
 

You need to file an ITR for the commuted pension that you receive if it is higher than the allowed value. You need to pay full tax on the excessive commuted amount you receive. However, do note that there is a certain relaxation under the Income Tax Act Section 89. To avail yourself of the tax relaxation, you will have to fill out Form 10E. You will also have to report your commuted income when filing an ITR in a specific year.  

Financial emergencies can appear at any time, and you may need urgent funds. Commuting your pension plan is a viable option for meeting your financial adversities. However, commuted pension amounts are taxable. Hence, you need to consider the funds to withdraw as a lump sum and the tax exemption limits before opting for such options. Moreover, you should have a strong corpus to have a regular income after retirement to maintain your lifestyle post retiring. 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.