It appears that private sector pensioners are unlikely to be able to claim the Rs 40,000 standard deduction tax break proposed in Budget 2018 unless the government issues a specific clarification to the contrary. However, government pensioners will be able to take the full benefit.
Most private sector employees do not get any pension as such directly from their employers after retirement. These employees can get pension from the Employee Pension Scheme (EPS) if they were members of this scheme during their employment period or buy an annuity (a type of pension) from an insurance company. Even those contributing to the National Pension System (NPS) can only get pension after retirement by using a portion of the final corpus to buy an annuity from an insurer. Therefore, the main ‘pension’ sources for private sector employees after retirement are EPS or annuities from insurers. However, as per experts it appears unlikely that, as per existing laws, a person getting these kind of pensions –EPS or annuity—would be able to claim the proposed standard deduction of Rs 40,000. Consequently, private sector pensioners are unlikely to be able to get benefit of this tax break unless the government issues a specific notification to the contrary.
Sonu Iyer, direct tax partner, EY India says: “Post amendment by Finance Bill 2018, standard deduction will be available for income assessable as salary income. Payment of salary income has corresponding TDS obligation on the employer. Currently there is no clarity on whether pension income from EPS or NPS is assessable as salary income. The Central Board of Direct Taxes (CBDT) should clarify this issue at the earliest.”
Regarding pension received as annuity from insurers such as LIC, she says: Such “pension” under private pension schemes unconnected with employment, would be treated as private pension which is in the nature of investment income. It is neither ‘salary’ income nor ‘family pension’. Such private pension would be taxable as ‘Income from other sources’ and no standard deduction is available. To clarify, the standard deduction of Rs. 40,000 proposed in Budget 2018 applies only to ‘salary’ income.”
Abhishek Soni, chartered accountant and CEO at Tax2Win.in, holds that the standard deduction of Rs 40,000 would not be available to those receiving pension under pension plans of insurance companies i.e. annuities. Regarding pension from EPS or NPS he says: “Pension received only from employer is eligible for the benefit of deduction of Rs 40,000. Normally, pension received from EPS and NPS is not treated as pension received from employer because there is no employer and employee relationship as these funds are managed by the organisations other than the employer. Therefore, in our view, benefit of deduction of Rs, 40,000/- will not be available to the pension received from NPS fund or under EPS. However, it is expected that CBDT will issue necessary clarifications on the said issue.”
However, Chetan Chandak, head of tax research, H&R Block India, holds that there are two differing views on whether the pension received from EPS or NPS will qualify for the proposed standard deduction of Rs. 40,000 or not.
As per Chandak, pension is described in section 60 of the CPC and section 11 of the Pension Act as a periodical allowance or stipend granted on account of past service, particular merits etc. He points out that there are three important features of ‘pension’.
1. Pension is a compensation for past service.
2. It owes its origin to a past employer-employee or master-servant relationship.
3. It is paid on the basis of earlier relationship of an agreement of service as opposed to an agreement for service.
This relationship terminates only on the death of the concerned employee.
Chandak says that one argument is that the pension received from EPS or NPS satisfies all the above listed conditions and is a pension received from a former employer and is taxable as ‘Salary’. Hence, the various deductions available on salary income, including relief u/s 89(1) or the newly proposed standard deduction would be granted to pensioners who received their pension from EPS or NPS. Other argument is that the pension paid under EPS or NPS is not a compensation for past services and it is paid as an annuity against the contribution made in past by the employee (and by the employer on behalf of the employee).
In Chandak’s opinion the first view looks reasonable and prominent in case of EPS considering the fact that only the employer contributes to the EPS and this is done with the intention to provide a regular pension to the employee post his retirement. On the contrary in case of NPS both employer and employee contribute to the NPS and therefore the pension received from NPS is not paid purely for past services of the employee. As such standard deduction will not be applicable in case of pension received from NPS, opines Chandak. Therefore, to bring more clarity and to avoid any confusion tax department or the government should come forward and clarify the provision, he says.
Thus, most experts agree that pension from insurance companies would not qualify for the standard deduction proposed in the budget. As things stand, they also appear to lean towards the view that EPS and NPS pensioners too would not be able to claim this tax break unless the CBDT issues specific clarification to the contrary.
We requested CBDT for a clarification on the above issue via email Friday last week but are yet to receive a reply despite telephonic reminders.
Therefore, going by the law that is clear till now, private sector pensioners appear to have been left out in the cold as far as this tax break goes.
