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U.K. Govt. pension & U.S. social security tax exempt, family pension of widows earns standard deduction!

        Some interesting issues relating to taxability of receipt of commuted pension by specified employees, leave salary and family pension etc. received by legal heirs of a deceased employee and Public Pensions/Social Security payments received from abroad by Indian Residents, covered in the write up today, will be of readers’ interest and useful reference.   

     Under the provisions of Section 10(10A), any commuted pension received by any employee of the Government, local authority or statutory corporation is wholly exempt from tax. In respect of a non-Government employee, payment arising in commutation of pension received is exempt to the extent of the commuted value of one-third of the pension, in case he is entitled to receive gratuity and one-half of such pension in any other case.


      Standard Deduction under Section 16 allowable at the rate 40% on salary income, subject to a maximum of Rs.30,000 came to be abolished with effect from Assessment Year 2006-07, thus depriving pensioners of this valuable deduction from their pension income.

       However, ‘Family Pension’ received by a widow after the death of her husband, from his former employer is assessable as income from other sources.  It needs to be noted that Section 57(iia) provides for a Standard Deduction of one third of the amount of family pension, subject to a maximum of Rs.15,000.  In case family pension is being received by the children of the deceased employee, they would also be entitled to separate deduction from their pension income. Fortunately this deduction under Section 57 has yet not been tampered with.

               Under Letter No.35/1/65-IT(B) dated 5-11-1965, the Central Board of Direct Taxes (CBDT) has clarified that the leave salary paid to the legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary.  Similarly, under Circular No.309 dated 3-7-1981, the CBDT has also clarified that receipt of cash equivalent of leave salary, which the deceased Government employee would have got if he had gone on earned leave, by the family of the deceased employee, is not liable to income-tax.


                 Several former residents of the United States (U.S.), who have settled in India, derive Social Security Benefits and Public Pensions in the U.S. In general terms, an individual who is Resident & Ordinarily Resident (R&OR) for tax purposes in India is required to pay tax in India on his or her global income. However, as per Article 20(2) of the Double Tax Avoidance Agreement (DTAA) between India and the U.S., such Social Security Benefits and Public Pensions paid by the U.S., even to an Indian Resident and R&OR under Indian Tax Laws, are taxable only in the U.S. and not required to be offered for income-tax in India.

                   As per Article 19(2) of the DTAA between India and United Kingdom (U.K.), any pension paid to an individual who had earlier rendered services to the British Government, and who has since settled as a Resident in India, is taxable only in the U.K. Hence, in the case of a person who is even R&OR for tax purposes in India, U.K. Government Pension would not be taxable in India.


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