Tax upon pension

The paying branch is responsible for deduction of Income Tax at source from pension payments in accordance with the rates prescribed from time to time. While deducting such tax from pension payments the paying branch also allow deduction on account of relief available under Income Tax Act from time to time on production of proper and acceptable evidence of eligible savings by pensioners. The paying branch also issue the pensioner in April each year a certificate of tax deducted in the form prescribed in the Income Tax Rules.

Under section 9(1)(iii), pension accruing is taxable in India only if it is earned in India. Pensions received in India from abroad by pensioners residing in this country, for past services rendered in the foreign countries, will be income accruing to the pensioners abroad, and will not, therefore, be liable to tax in India on the basis of accrual. These pensions will also not be liable to tax in India on receipt basis, if they are drawn and received abroad in the first instance, and thereafter remitted or brought to India.

It is only in cases where in pursuance of a definite agreement with the employer or former employer, the pension is received directly by the pensioner in India that the pension would become taxable in India on receipt basis.

While the pension earned and received abroad will not be chargeable to tax in India if the residential status of the pensioner is either 'non-resident' or 'resident but not ordinarily resident', it will be so chargeable if the residential status is 'resident and ordinarily resident'. The aforesaid status of 'ordinarily resident' cannot, however, be acquired by a person unless he has been resident in India in at least nine out of the preceding ten years.

Note :-
Retirement/death gratuity and the lumpsum amount received on account of commutation of pension is not taxable under Income Tax Act.