It is well known that pensions are taxable as salary and whereas a family pension given to dependent family members after the death of an employee is taxable as income from another source under the Income Tax Act. However, in certain special circumstances, a pension is tax-free under the income tax act. In some cases, such exceptional circumstances that make a pension tax free are provided under section 10 of the Income Tax Act itself, whereas in other cases, tax exemption is available because of either CBDT circular or instruction or by virtue of the court’s decision.
Table of Contents
Pensions to Gallantry Award Winners
Any pension received by the gallantry award holder is tax-free, but the types of the award is also notified. Section 10(18) of the I T Act provides an exemption for such gallantry award winners and even to the family pension received by a member of the family of gallantry winners. Read the provision of law -section 10(18 of the Income tax Act below :
18) any income by way of—
(i) pension received by an individual who has been in the service of the Central Government or State Government and has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other gallantry award as the Central Government may, by notification in the Official Gazette, specify in this behalf;
(ii) family pension received by any member of the family of an individual referred to in sub-clause (i).
The notified Gallantry awards for the purpose of section 10 (18)( 1) of the Income Tax Act can be found here.
Notification: 1048(E)
Section(s) Referred: s. 10(18)(i)
Statute: INCOME TAX
Date of Issue: 24/11/2000
In exercise of the powers conferred by sub-clause (i) of clause (18) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, hereby specifies the gallantry awards for the purposes of the said section, mentioned in column 2 of the table below awarded in the circumstances as mentioned in corresponding column 3 thereof :
TABLE -------- Sl. Name of gallantry award Circumstances for eligibility No. -------- (1) (2) (3) --------
1. Ashok Chakra When awarded to civilians for gallantry
2. Kirti Chakra -do-
3. Shaurya Chakra -do-
4. Sarvottan Jeevan Raksha Padak When awarded to civilians for bravery displayed by them in life saving acts. 5. Uttam Jeevan Raksha Medal -do- 6. Jeevan Raksha Padak -do- 7. President's police medal for gallantry When awarded for acts of exceptional courage displayed by Members of Police Forces, Central Police or Security Forces and certified to this effect by the head of the department concerned.
8. Police medal for gallantry -do-
9. Sena Medal When awarded for acts of courage or conspicuous gallantry and supported by certificate issued to his effect by relevant service headquarters.
10. Nao Sena Medal -do- 11. Vayu Sena Medal -do- 12. Fire Services Medal for gallantry When awarded for acts of courage or conspicuous gallantry and supported by certificate issued to this effect by the last head of department.
13. President's Police and Fire Services -do- Medal for gallantry
14. President's Fire Services Medal for -do- gallantry
15. President's home Guards and Civil -do- Defence Medal for gallantry
16. Home Guards and Civil Defence -do- Medal for gallantry --------The meaning of family is given in Explanation under clause 5 of section 10 which is as under
For the purposes of this clause, family, in relation to an individual, means (i) the spouse and children of the individual; and (ii) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual;
2. Family Pensions to Widows & Children of Armed Force Personnel Who Dies in Course of Duties
The Clause 19 of section 10 provides that pension received by widow or children of members of armed forces who dies in course of duties are tax free. Read the provision
(19) family pension received by the widow or children or nominated heirs, as the case may be, of a member of the armed forces (including para-military forces) of the Union, where the death of such member has occurred in the course of operational duties, in such circumstances and subject to such conditions, as may be prescribed;
What are the prescribed circumstances?
Rule 2BBA of Income Tax Rule prescribes that only death of a member of the armed forces (including paramilitary forces in the course of operational duties in the following circumstances shall be given the benefit of section 10(19) of the Income Tax Act:—
(i) acts of violence or kidnapping or attacks by terrorists or anti-social elements;
(ii) action against extremists or anti-social elements;
(iii) enemy action in international war;
(iv) action during deployment with a peace keeping mission abroad;
(v) border skirmishes;
(vi) laying or clearance of mines including enemy mines as also mine sweeping operations;
(vii) explosions of mines while laying operationally oriented mine-fields or lifting or negotiation minefields laid by the enemy or own forces in operational areas near international borders or the line of control;
(viii) in the aid of civil power in dealing with natural calamities and rescue operations;
(ix) in the aid of civil power in quelling agitation or riots or revolts by demonstrators.(2) It shall be certified by the Head of the Department where the deceased member of the armed forces(including paramilitary forces) last served, or the service headquarters, as the case may be, that the death of such member has occurred in the course of operational duties in circumstances mentioned in sub-rule (1).
3. Disability Pensions to Armed Forces
Armed Forces personnel get the disability pension, which is an aggregate of two components-disability pensions and service pension. On the question of its being tax-free, the first thing to note is the fact that the tax exemption on the disability pension is not provided under section 10 or anywhere in the Income Tax Act. The disability pension has been made tax-free by executive instructions of the government. But note that invalid pension is not given tax exemption. Read the article Disability Pension is Tax Free !
4. Pensions Received from Organization Covered Under United Nations (PI) Act 1947
The salaries and emoluments paid by the United Nations to its officials are tax free in India by virtue of Now, Section 2 of the United Nations (Privileges & Immunities) Act, 1947, read with section 18, clause (b) of the Article V of the Schedule thereto. But , is the pension paid by UN tax free ?
This question was before the Karnataka High Court in CIT v. K. Ramaiah [1980] 126 ITR 638 . The hon’ble high court answered the question” whether pension received by the erstwhile officials of the United Nations from it would be exempt from income tax” in the affirmative. The Court held that the Tribunal had correctly interpreted the relevant statutory provisions of the Act as well as of the United Nations (Privileges & Immunities) Act, 1947, read with section 18 clause (b) of article V of the Schedule thereto.
The aforesaid decision of Karnataka High Cort was again relied upon by Delhi High Court in CIT vs P.L.Narula [1984] 17 taxmann 223in which the hon’ble high court affirmed the decision of ITAT that held in favour of assessee that the pension received is exempt even if received from an organization which is covered under United Nation ( Privileges & Communities) Act 1947
CBDT circular on Pensions from UN
After the decision of the Karnataka High Court, the CBDT issued Circular No. 293 [F. No. 200/140/80-IT (AI)] dated 10-2-1981, [1981] 130 ITR (St.) 5 reading as follows:
“…………. The Board have accepted the decision of the Karnataka High Court. 2. In view of the foregoing, apart from salary received by employees of the United Nations Organisation or any person covered under the United Nations (Privileges & Immunities) Act, 1947, pension received by them from the UN will also be exempt from income tax. Pending appeals on this point may be conceded and reference applications withdrawn.”
5. Commuted value of Pension are Tax free !
When you get a retirement pension, you have the freedom to commute a portion of the said pension under the pension rules. Income Tax Act experts the commuted value of the pension as tax-exempt under section 10(A) . The tax exemptions are different for government and non-government retiring employees. For a government employee, commuted value of the pension is fully exempt, but in the case of private-sector employees, pensions are only partially exempt as stated below :
- When the employees receive any gratuity, the commuted value of 1/3rd of the pension which the employee is normally entitled to receive is exempt.
- In any other case, the commuted value of 50% of the pension which the employee is normally entitled to receive is exempt
Also note that even the commuted pension received from the pension funds set up under [referred under section 10(23AAB) is fully exempt.
Conclusion on Tax Exemption of Pensions
- The pension to Gallantry award winners are tax free.
- The pension to widow or children of armed forces personnel who die in course of duties is also tax free.
- Disability pension to Armed Forces Personnel is also tax free.
- The pension received from UN or its associated organization like WHO is also tax free .