It’s no secret that the passing of a loved one can be an emotional and overwhelming experience. On top of that, there are often complex financial matters to navigate, including the distribution of assets and determining if any taxable income is due. One area that many families may not have considered is the taxation of the liberalised family pension. That’s why it’s important to understand how this type of pension may be taxed, and what you need to do to ensure you are in compliance with tax laws.
So, what is a liberalised family pension? Essentially, it’s a pension that is paid out to surviving dependents after the death of the pension holder. This type of pension is generally offered by public and private sector employers in India, and it can be a vital source of income for families who have lost a loved one. However, it’s essential to understand that this type of pension may be subject to taxation, just like any other type of income.
When it comes to taxation, there are several factors that come into play, including the amount of the pension, the age of the pension recipient, and the tax laws in your specific jurisdiction. In general, if the pension is below a certain threshold, it may not be taxed at all. However, if the pension exceeds that threshold, it may be subject to taxation at a specific rate. It can be a complicated matter, and it’s essential to have a good understanding of the tax laws and your obligations as a recipient of a liberalised family pension.
Understanding Family Pension
Family pension is the pension received by the spouse or dependent family members of a government employee after his/her death.
It is a type of social security benefit provided to a family member, usually the spouse, of a deceased employee who was eligible for a pension at the time of their death.
The family pension is calculated based on the last basic pay received by the employee. The amount of pension received by the spouse or dependent family members is a percentage of the average pay of the deceased employee.
Key Features of Family Pension
- The family pension is provided to the dependent family members of the government employee in case of the untimely death of the employee.
- The pension amount is calculated based on the last pay received by the employee and is a percentage of the average pay of the employee.
- The pension is provided to the spouse and dependent children of the employee until their death or remarriage, whichever is earlier.
Is Liberalised Family Pension Taxable?
Liberalised family pension is the enhanced pension provided to the dependents of the government employee who dies while in service and has rendered a continuous service of not less than seven years. This pension includes dearness relief and is paid until the lifetime of the spouse or the dependent children.
Liberalised family pension is treated as regular income for tax purposes and is taxable under the head “income from other sources”. The pension amount is added to the income of the spouse or dependent receiving the pension and taxed at the applicable tax rate.
| Taxable Income | Tax Rate |
|---|---|
| Up to Rs. 2,50,000 | Nil |
| Rs. 2,50,001 to Rs. 5,00,000 | 5% |
| Rs. 5,00,001 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
It is advisable for the spouse or dependent family members receiving the liberalised family pension to consult a tax expert to understand the tax implications and plan their finances accordingly.
Taxation of Pension Types
Retirement can be a daunting task, especially when it comes to financial planning. One of the most critical aspects of planning for retirement is understanding the taxation of pension types. Different types of pensions have different tax implications, and it is essential to know them before making any decisions about withdrawing or investing your funds.
- Defined Benefit Pension Plans: These types of pension plans are taxed the same way as regular income. When you retire and begin receiving your pension payments, they are taxed at your marginal tax rate. The more money you receive, the higher your tax rate will be.
- Defined Contribution Pension Plans: The tax implications of these types of pensions depend on whether they are registered or non-registered. Contributions made to registered pension plans are made with pre-tax dollars, which means that they will be taxed when you withdraw them. The withdrawals are taxed as regular income. On the other hand, non-registered defined contribution plans are taxed differently. The contributions are made with after-tax dollars, which means that they are not taxed when you withdraw them. However, any gains on your investments are taxed as capital gains.
- Liberalised Family Pension: In the case of a liberalised family pension, the tax implications are slightly different. A liberalised family pension is an annuity that is paid to the spouse, children, or dependent parents of a deceased pensioner. The pension is paid out of the pensioner’s accumulated savings, and it is taxable to the recipient as regular income. However, the tax implications depend on the relationship between the pensioner and the recipient. If the recipient is the spouse, the pension income is taxable in the hands of the spouse as regular income. If the recipient is a child or dependent parent, then the pension income is taxed as an income of the recipient.
It is essential to understand the tax implications of different pension types so that you can plan your retirement effectively. Consulting a financial planner or tax professional can help you make informed decisions that will help you maximize your retirement income and minimize your tax bill.
Below is a table summarizing the tax implications of different pension types:
| Pension Type | Tax Implications |
|---|---|
| Defined Benefit Pension Plans | Taxed as regular income at marginal tax rate |
| Defined Contribution Pension Plans (Registered) | Contributions made with pre-tax dollars; withdrawals taxed as regular income |
| Defined Contribution Pension Plans (Non-Registered) | Contributions made with after-tax dollars; gains taxed as capital gains |
| Liberalised Family Pension | Taxable as regular income, depends on the relationship between the pensioner and the recipient |
Knowing the tax implications of pension types is crucial to planning your retirement effectively. By understanding the tax implications of each pension type, you can make informed decisions about investing and withdrawing your funds, ultimately maximizing your retirement income and minimizing your tax bill.
Liberalized Family Pension Explained
Liberalized Family Pension is a pension scheme that is provided to the family of a government employee who dies while serving the government. It is granted as a monthly pension to the spouse or dependent children of the deceased employee.
This pension scheme was introduced by the Government of India to safeguard the interests of the family members of government employees who die while serving the nation. The pension scheme provides financial assistance to the surviving family members and helps them to cope up with the loss of the earning member.
Is Liberalized Family Pension Taxable?
- Liberalized Family Pension is taxable under the Income Tax Act, 1961.
- The pension amount is considered as the income of the recipient and is taxed under the head ‘Income from Other Sources’.
- The tax liability is calculated as per the Income Tax Slab applicable to the recipient for the financial year in which the pension is received.
Calculation of Tax on Liberalized Family Pension
The tax liability on the Liberalized Family Pension is calculated based on the total pension received during the financial year. The pension amount is added to the gross income of the recipient and taxed accordingly. The tax liability is calculated as per the Income Tax Slab applicable for the financial year in which the pension is received.
For example, if the pension amount received during the financial year is Rs. 3,00,000 and the applicable Income Tax Slab for that year is 10%, then the tax liability on the pension amount would be Rs. 30,000.
Exemption from Tax on Liberalized Family Pension
There are certain exemptions available under the Income Tax Act, 1961 for Liberalized Family Pension. These exemptions are given to the family members of the deceased employee who are in financial need and are unable to support themselves.
| Exemption Criteria | Exemption Limit |
|---|---|
| Family Pension received by a minor child | Exempt up to Rs. 1,500 per annum |
| Family Pension received by a disabled dependent | Exempt to the extent of disability |
| Family Pension received by a widow or other eligible members of Armed Forces | Fully exempt |
It is important to note that these exemptions are applicable only if the recipient fulfills the eligibility criteria as per the Income Tax Act, 1961. In case the recipient does not fulfill the criteria, the entire pension amount would be taxable.
Recent Changes in Family Pension Taxation
Family pension is a payment made to the family members of a deceased employee as a financial support. Earlier, the family pension received was taxable as “income from other sources”. However, with the recent changes in taxation laws, the rules for family pension received by the dependents have been modified.
- Exemption limit increased: The exemption limit for family pensions has been increased from INR 15,000 per month to INR 1.25 lakh per annum.
- Standard deduction: An additional standard deduction of INR 40,000 is available from family pension income.
- Divisible share: If the pension is distributed among different members of the family, each member is entitled to a separate exemption limit.
The above changes have brought a significant relief for the family members of the deceased employee who are dependent on the family pension for their livelihood.
However, there are certain situations where the family pension may still be taxable:
- If the pension is received from any foreign source, it is taxable.
- If the pension is received by any individual, who is not a family member of the deceased employee, it is taxable in the hands of the recipient.
The following table shows the applicable tax rates on family pension income based on the slab rate for financial year 2021-22:
| Total Income (in INR) | Tax rate |
|---|---|
| Up to 2.5 lakhs | Nil |
| 2.5 lakhs to 5 lakhs | 5% |
| 5 lakhs to 7.5 lakhs | 10% |
| 7.5 lakhs to 10 lakhs | 15% |
| 10 lakhs to 12.5 lakhs | 20% |
| 12.5 lakhs to 15 lakhs | 25% |
| Above 15 lakhs | 30% |
Hence, it is important for individuals who receive family pension to understand the recent changes in the taxation rules to avoid any tax-related discrepancies or complications.
Difference Between Family Pension & Annuity
Family pension and annuity are two terms that are often used interchangeably but actually have very distinct differences. Here we will explore these differences to help you better understand these two concepts.
- Definition: Family pension is a benefit paid to the surviving spouse or dependents of a government employee after the employee’s death. An annuity, on the other hand, is a contract between an individual and an insurance company that provides a guaranteed income stream in exchange for an initial lump-sum payment.
- Payment: Family pension payments are made by the government, whereas annuity payments come from an insurance company.
- Termination: Family pension payments usually end when the spouse or dependents die. Annuity payments may continue throughout the annuitant’s lifetime or for a predetermined period of time.
While annuities are typically purchased by individuals for their retirement, family pension is a benefit provided by government organizations, such as the military or civil service, to support the families of their employees after their passing. This means that family pension payments are considered an income and may be subject to taxation.
However, in recent years, family pension has been liberalized and the rules governing taxation have changed. Currently, 100% of the family pension is tax-exempt for the spouse of the deceased employee, and 60% of the pension is tax-exempt for other eligible dependents.
| Taxable Portion | Spouse of Employee | Other Eligible Dependents |
|---|---|---|
| Up to Rs. 5 lakhs | 0% | 0% |
| Rs. 5 lakhs-10 lakhs | 20% | 20% |
| Above Rs. 10 lakhs | 30% | 30% |
It is important to note, however, that these rules are subject to change and may vary by country or region. It is always best to consult with a tax professional for specific guidance on your unique situation.
Impact of Family Pension on Income Tax Return
Family pension is a pension that is received by the dependents of a government employee after their death. This pension is paid by the government to support the family of the deceased employee. The family pension is taxed in the hands of the recipient and is treated as their income.
- The amount of family pension that is received is added to the income of the recipient and is taxed as per their tax slab. This means that if the recipient falls in a higher tax bracket, they will have to pay more tax on the family pension that they receive.
- If the recipient of the family pension is also eligible for a basic exemption limit, then they can claim the exemption on the total income, which includes the family pension.
- If the recipient of the family pension is a minor, then the income is added to the income of the parent and is taxed as per the parent’s tax slab.
Moreover, there are also other tax implications associated with family pensions which are listed in the table below:
| Tax Implication | Details |
|---|---|
| Standard Deduction | Family pension is considered as income under the head ‘income from other sources’. Hence, the standard deduction of Rs. 50,000 is allowed to the recipient while calculating the tax liability. |
| Surcharge | If the total income of the recipient including the family pension exceeds Rs. 50 lakh, then a surcharge is levied on the tax payable. The surcharge varies from 10% to 37% depending on the income slab. |
| Interest on Tax Due | If the recipient fails to pay the tax on the family pension, then interest is levied under section 234B and 234C of the Income Tax Act. |
Therefore, it is important for the recipient of the family pension to be aware of the tax implications associated with it so that they can plan their finances accordingly and avoid any penalties or interests on the tax payable.
Exemption on Family Pension for Senior Citizens
Family pension is a pension paid to the family members of a deceased Government employee or a pensioner. It is a vital source of financial support for the family members in times of need. However, the question remains, is liberalised family pension taxable? The answer is yes, it is taxable under the Income Tax Act, 1961, but there is an exemption available for senior citizens.
- According to Section 10(18) of the Income Tax Act, any amount received as a family pension by the family members of a Government employee or a pensioner, who has passed away, is exempt from tax if the recipient is a senior citizen. Senior citizens are individuals who are 60 years of age or older.
- The exemption is only applicable to the family pension and not to any other income of the recipient.
- Additionally, the exemption is only available for family pensions received from the Government and not from any other employer.
The following table provides a summary of the exemption available for senior citizens:
| Criteria | Exemption Available |
|---|---|
| Recipient of family pension is a senior citizen | Exempt from tax |
| Family pension received from the Government | Exempt from tax |
| Exemption applicable only to family pension and not to any other income of the recipient | N/A |
Therefore, it is essential for senior citizens to take advantage of this exemption on family pension under Section 10(18) of the Income Tax Act to minimise their tax liabilities.
Is Liberalised Family Pension Taxable FAQs
1. What is a liberalised family pension?
A liberalised family pension is a pension paid to eligible family members of a deceased government employee or pensioner.
2. Is a liberalised family pension taxable?
Yes, a liberalised family pension is taxable as income under the head of income from other sources.
3. Is there any exemption available for liberalised family pension?
Yes, a standard deduction of Rs. 40,000 or one-third of the pension amount, whichever is lower, is available as an exemption.
4. Are there any other deductions allowed on liberalised family pension?
No, there are no other deductions allowed on liberalised family pension apart from the standard deduction.
5. Who is responsible for deducting the tax on liberalised family pension?
The pension paying authority is responsible for deducting the tax at source before making the payment of the liberalised family pension.
6. Do I need to file an income tax return if I only receive a liberalised family pension?
If your taxable income including the liberalised family pension exceeds the basic exemption limit, then you are required to file an income tax return.
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