If an employee passes away, the family pension received by the spouse will fall under the purview of income tax. Up to 60% of the subscriber's corpus withdrawal at retirement will be tax-free, while general income tax will apply to the monthly pension. Up to 25% of the amount in partial withdrawals is tax-free.
UPS Pension Scheme: The Department of Financial Services (DFS) has stated that under the Unified Pension Scheme (UPS), the family pension received by the spouse upon an employee's demise will be taxable under "Income from Other Sources." Subscribers can withdraw up to 60% of their corpus at retirement or superannuation, which will be tax-free, while general tax will apply to the monthly pension. Up to 25% of the amount in partial withdrawals will also remain tax-free.
Family Pension Will Be Taxable
The DFS has clarified that if an employee passes away and their spouse receives a family pension, it will be considered taxable under the provisions of the Income Tax Act. It has been deemed taxable under "Income from Other Sources." This means that the amount received by the spouse will be fully subject to tax.
The purpose of applying tax to family pensions is to ensure that the pension amount remains taxable according to government tax regulations. Under this, the amount will be added to the annual income and taxed according to the general income tax slab.
Withdrawal Rules at Retirement
UPS subscribers can withdraw up to 60 percent of their corpus amount at the time of retirement or superannuation. Additionally, the option for partial withdrawal is also available during service. According to DFS, subscribers can make partial withdrawals of up to 25 percent of their contribution tax-free. This tax exemption is provided under Section 10(128) of the IT Act.
Different tax rules will apply to the remaining amount. This withdrawal option at retirement provides financial flexibility to employees and helps them manage their pension or lump sum amount according to their needs.
Tax Applicable to Monthly Pension
The monthly pension received by the subscriber after retirement will be considered taxable similar to salary income. DFS stated that general income tax rules will apply to the monthly pension. This pension amount will be added to the subscriber's total annual income and taxed according to the tax slab.
At the time of retirement, subscribers can withdraw 60 percent of their corpus. This amount will be completely tax-free, which is valid under Section 10(12AA). Tax rules will apply to any additional amount.
Understand Tax Calculation with an Example
DFS has clarified how tax will be applied by providing an example. Let's assume:
- Monthly Salary: ₹3 Lakh
- Service Period: 25 Years
- Individual Corpus: ₹2 Crore
- Benchmark Corpus: ₹1.80 Crore
At the time of retirement, 60 percent withdrawal, i.e., ₹1.08 Crore, will be tax-free. Additionally, out of the extra ₹20 Lakh, 60 percent, i.e., ₹12 Lakh, will be tax-free, while the remaining ₹8 Lakh will be taxable. The remaining 40 percent of the corpus (₹72 Lakh) will be transferred to the pool corpus, which will not be taxed.
Clarification from DFS
DFS also stated that these rules for UPS subscribers have been formulated keeping in mind the balance between financial security and tax regulations. Providing clear information on tax rules for pension and family pension is essential for employees and their families.
