What are the Tax Implications of Family Pension in India

Navigating the tax landscape in India can be complex, especially when you have a specific financial income like a family pension. Whether you are a pensioner or a family member of one, awareness about the nitty-gritty of a family pension is vital for your financial planning. The purpose of this blog post is to explain what a family pension is, who qualifies for one, and its tax implications.

What is Family Pension?

A family pension is a monthly payment made by the employer to the family members of an employee who has passed away or is permanently disabled, thereby incapable of earning for the family. This benefit ensures that the family has a regular source of income even after the loss or incapability of the breadwinner.

Who is Eligible for a Family Pension?

Eligibility for family pension varies depending on the terms of employment and the employer’s policies. Generally, the following categories of family members are eligible:

1. Spouse

2. Dependent children

3. Dependent parents

If an individual had been a government employee, family pension rules are often governed by the specific guidelines laid out by the concerned government body. Generally 50% of the spouse pension is received on the demise of near and dear ones. In the private sector, eligibility for family pension largely depends on the guidelines of the respective organisation or insurance schemes.

Tax Implications of Family Pension

Understanding the tax implications of family pensions can help you plan your finances better. So, is family pension taxable? The short answer is yes, family pension is treated as ‘Income from Other Sources’ under the Income Tax Act of 1961 and is therefore subject to tax. However, there are certain exemptions and deductions available that can ease the tax burden.

Standard Deduction

According to Section 57(iia) of the Income Tax Act, a standard deduction of one-third of the annual family pension or ₹15,000, whichever is less, is allowed. This means that you don't pay tax on the entire family pension income, but only on the remaining amount after the standard deduction is applied.

Example Calculation

Let's assume you receive an annual family pension of ₹1,80,000. According to the standard deduction provision, you can either deduct one-third of ₹1,80,000 which is ₹60,000 or ₹15,000, whichever is less. In this case, ₹15,000 is the lesser amount. So, your taxable family pension would be ₹1,80,000 - ₹15,000 = ₹1,65,000.

Tax Slabs

The taxable amount after the standard deduction, falls under the prevailing income tax slabs. For example, for the financial year 2022-2023, if the taxable income including the family pension after standard deduction is below ₹2.5 lakhs, then no tax is payable. For income between ₹2.5 lakhs to ₹5 lakhs, the tax rate is 5%, and it goes higher for subsequent slabs.

TDS on Family Pension

Family pension is typically not subject to Tax Deducted at Source (TDS). However, it is still the recipient's responsibility to declare this income while filing their annual tax returns.

Form 15H/TDS Exemption

Senior citizens who are not liable to pay tax can submit Form 15H to their payer to ensure that no TDS is deducted from their family pension income. However, the eligibility for submitting Form 15H depends on various conditions like age and overall income, among others.

Final Thoughts

Family pension serves as an essential financial support for families after the demise or disability of an earning member. Knowing the tax implications can significantly help you plan your yearly finances and accurately fulfil your tax obligations.

In summary, family pension is taxable under the ‘Income from Other Sources,’ but you can avail of a standard deduction as per Section 57(iia) of the Income Tax Act. It’s crucial to consider the prevailing income tax slabs and to include this income while filing tax returns. Consulting a tax advisor can give you more personalised guidance on how to optimise your tax liability concerning your family pension.