Pension arising to an employee out of his/her past or present employment is taxed as Salary under Sec. 17 of the Income Tax Act, 1961 with a standard deduction of ₹50,000 or the salary amount whichever is lower (the cap of ₹50,000 was ₹40,000 until March 31, 2020). Any pension taxed under salary is subject to TDS under Sec. 192 as applicable for salaries.
Pension payable to one’s family (family pension) upon his/her death is taxed under the residuary head “income from other sources”, in vogue since April 1, 1990.
People receiving pension from LIC or from other insurers post their employment is also taxable as salaries, thus eligible for standard deduction of ₹50,000 and it is only if the same pension is received in the hands of the legal heirs or their families it gets taxed as income from other sources under family pension. TDS on family pension is not covered under Sec. 192 of the Act.
Standard deduction wrangle
There is a standard deduction available on this family pension at one-third of the pension or ₹15,000 whichever is less. The cap of ₹15,000 was earlier ₹12,000 until March 31, 1998. People who receive family pension deserve to be granted a higher/fairer amount as standard deduction as a lot of them might be at marginal income levels. Fortunately, family pension received by members of armed forces is exempt from tax.
Finance Bill 2022 proposes a change in Sec. 80DD with effect from April1, 2023 for receipt of disability dependent pension plan in the hands of the contributory during the life time of the disabled dependent beneficiary. This is based on a writ petition before the Supreme Court wherein it was remarked that parents/guardians of disabled dependents might also deserve payment annuity/lump sum payment, which needs consideration by the Centre on compassionate grounds.
A similar thought process has not come up for upping standard deduction on family pension. It is better if the case of family pensioners is considered before the Bill becomes an Act to reinforce credibility of policy making besides comforting family pensioners.
One fails to understand the wisdom of the legislature to raise only the standard deduction on salaried pension periodically but not on family pension. Even salary standard deduction which remained at once upon a time at ₹12,000 has risen to ₹50,000 as of now. Every pre-Budget proposal has one way or other carried a request for review of standard deduction on family pension as well ending with little success.
It is unknown whether family pension has remained at dismal levels not warranting any increase in standard deduction. The debate here is not about the sufficiency or insufficiency of the standard deduction; under salary or under family pension but the unfair treatment meted to standard deduction on family pension vis-a-vis pension taxable under salary.
There are a number of provisions in the statute which remain removed from reality be it on issue of real income taxation going amiss or trite provisions remaining farfetched from contextual cost of living. The curious case of standard deduction on family pension also remains one belonging to this tribe.
As a special case family pension may also get clubbed under salary head of taxation thereby aligning it to standard deduction on salary. Winds of change are necessary in taxation but it should not come at the expense of fresh air to those in need.
The writer is a chartered accountant