Eligibility - Pension is given to employees in the pensionable establishments of the Government sector who have been appointed on or before 31 December 2003 and have spent 10 years in service in that establishment.
Pension can be of two types -
Uncommuted Pension - Pension received as periodical payments. If a person is entitled to a pension of Rs. 10,000 per month, he receives that amount every month.
Commuted pension - A lump sum payment made to the employee on retirement from the pension kitty in lieu of the regular pension. For example, if an employee has to receive Rs. 10,000 as monthly pension, he would decide to get 20% of the monthly pension as advance for the next 5 years. This means, Rs. 1,20,000 (2000 x 12 x 5) would be paid as a lump sum amount to him when he retires. The other 80% will be paid on a monthly basis. After 5 years, he will receive 100% of the amount on a monthly basis.
Taxability - Uncommuted pension or monthly pension is treated as salary income and is fully taxable in the hands of the pension receiver. If the family members get the uncommuted pension, 1/3rd of the pension amount or Rs. 15,000 whichever is less is deducted and the rest is taxable.
Commuted pension is exempt from tax for government employees if they receive it themselves. For non-government employees, it is exempt partially based on gratuity received. If the employee is in receipt of gratuity. If gratuity is receivable, 1/3rd of pension that may have been received is exempted if the retired employee had commuted the whole of the pension.
If gratuity is not applicable, 1/2 of pension that may have been received is exempted if the retired employee had commuted the whole of the pension.
Employees who joined the services of the government organizations after 2003, do not receive defined pension but can participate in contributory pension schemes such as NPS, EPF and Superannuation Fund.
National Pension Scheme (NPS) - One can participate in this scheme with any amount of contribution. The amount is invested as per the subscriber’s choice. Employee contribution up to 10% of salary is eligible for deduction from employees’ taxable income subject to a maximum of Rs. 1,50,000. An additional deduction of Rs. 50,000 is allowed. Employer contribution up to 10% of salary is not included in employees’ taxable income.
Employee Provident Fund (EPF) - An employee makes a certain contribution and an equal contribution is made by the employer. The employee gets the full amount with interest on retirement. Currently the interest rate is 8.55% p.a.
Superannuation Fund (SAF) - The employer sets up a fund for the employee and contributes a defined amount regularly. Employees can contribute voluntarily to the fund set up for them. The fund can be managed either by the organization's trust or the company can open a superannuation fund with an approved company like LIC or ICICI. Employee contribution is eligible for deduction from employees’ taxable income up to Rs. 1,50,000 per annum. Employer contribution up to Rs. 1,00,000 per annum not included in employees’ taxable income.