What is a Commuted Pension?
The annuity fund that generates your pension at retirement is partly funded by your organisation and yourself. When you retire, you can choose either of two methods to receive the accumulated amount:
- As pension paid on a monthly basis
- As an advance lump sum amount
A commuted pension is an advance amount that you get as a lump sum and which is deducted from your total pension fund. For instance, you may want to take your family on a trip once you're sixty years old. You'll require a lump sum payment for this purpose.
You can choose to get an advance of 20% of your monthly pension of Rs. 25,000 for the next five years. The total will be computed as follows and paid to you as a lump sum amount:
20% of 25,000*12*5 = Rs 3,00,000.This amount is your commuted pension.
Limitation of Commuted Pension
The retiree's job status is the primary factor that determines the taxability of a commuted pension:
- Income tax on a government employee's commuted pension is completely waived.
- For non-government employees receiving both pension and gratuity, one-third of the commuted pension amount is tax-free; the remaining portion is subject to taxation.
- Non-government workers receive a 50% commuted pension exemption in the event of no gratuity.
- Family members of the employee are eligible for tax exemptions of up to Rs. 15,000 or one-third of the pension amount in a given fiscal year, whichever is less.
- Families of members of the armed forces and workers of the United Nations Organisation (UNO) are totally exempted from paying taxes on their pensions.
If the amount of commuted pension received is more than the maximum tax-exempted amount, it becomes fully taxable in the applicable assessment year. On the other hand, if Form 10E is submitted for calculating commuted pension taxability, then Section 89 of the IT Act offers some tax relief.
Rule of Commuted Pension
Here are the key provisions that you should keep in mind:
- A government employee may commute up to 40% of a base pension in one lump sum payment under Rule 5 of the CCS (Commutation of Pension) Rules, 1981.
- Rule 10 mandates that the applicant will receive the difference between the authorised and increased commuted pension if the government modifies or increases a pensioner's benefits after commutation.
Commuted Pension Exemption Under Section 80C
Pensioners are eligible for a tax exemption of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Exemptions of Rs. 2 lakh can also be claimed under several categories if one is 60 years of age or older. These are some of the investment options that are tax-exempted under this section:
Fixed Deposit
Tax-saver fixed deposits are a good choice since they can get you deductions up to Rs. 1.5 lakh under Section 80C. However, they have 5-year lock-in periods, although the interest rates are sometimes higher for senior citizens.
ELSS
Equity-linked savings schemes (ELSS) are also tax deductible up to Rs. 1. 5 lakh under Section 80C. They have a 3-year lock-in period while offering higher returns in comparison to many other investments (the risks are also proportionately higher in this case).
Pension Plan Investments
Life insurance companies' pension plan schemes are also eligible for Section 80C deductions, making them good choices for retirees.

Senior Citizen Savings Scheme
This is an excellent method for converting your taxable commuted pension to a sum that is tax-free. You will also get interest as cash flow from the deposit simultaneously. Thus, you may convert a taxable commuted pension at a rate of Rs. 1.5 lakhs per year (if you can budget for around three to five years).
ULIP
You may profit from both investing opportunities and insurance with a suitable ULIP plan. A portion of your contribution is allocated to insurance, with the remaining portion going towards the investment bucket. You are entitled to a tax deduction under Section 80C for the premium investment you make throughout a fiscal year.
Difference Between Pension Payment and Commutation
Pension payments are defined as regular (usually monthly) and periodic payments; on the other hand, commutation refers to the withdrawal of a lump amount from the commuted pension.
Pension payments are made until death, although for government employees, commutation permits the withdrawal of up to 40% of the pension in one single amount.
How to Calculate Pension Commutation Deduction
Here are the steps to calculate a pension commutation deduction:
- Multiplying the commuted amount by itself and by 12 yields the total commutation amount. You can use a pension commuted value calculator for this purpose.
- Based on age-related considerations and commutation laws, the commuted amount is calculated by dividing the pension amount by the commuted percentage of the pension.
FAQs
Is the commuted value of the pension taxable?
A: Pension commutation taxation is contingent upon various criteria, including the form and source of the pension.
Do you need to file an ITR for commuted pension?
A: If the amount of your commuted pension exceeds the authorised value, you must file your ITR. The additional amount that you get is subject to full taxation. However, note that Section 89 of the Income Tax Act enables more flexibility in these scenarios. In order to take advantage of this tax break, complete Form 10E and report your commuted income while submitting your ITR for any given year.