Employees get salary during their service life, but after retirement when they get a stream of regular income, it is known as pension income. It is generally paid out a pension fund created by the employer to provide regular income to its retired employees and their family.
Pension may be of two categories Defined Benefit Plan and Defined Contribution Plan. Under Defined Plan, certain amount of retirement income is promised for life, which may also be inflation-linked and increase over time. However, under Defined Contribution Plan, contribution by the employer is guaranteed along with contribution of the employees, but retirement income is not guaranteed, which will depend on the performance of the pension fund.
Pension under Defined Benefit Plan is generally applicable to government servants who joined their services on or before December 31, 2003 and armed forces personnel and their families. But the employees, who joined government services after December 31, 2003, will get retirement income through National Pension System or NPS (earlier New Pension Scheme), which falls under Defined Contribution Plan.
While pension is provided to the employees who retired from services, the benefits provided to the families of retired employees after their demise are treated as family pension.
While the pension received by retired employees are considered as earned income and treated as salary, the benefits provided to the families of retired employees after their demise are treated as family pension and are considered as unearned income and treated as income from other sources.
So, retiring pension, which is granted to a government servant who retires, or is retired before attaining the age of superannuation or to a government servant who, on being declared surplus opts, for voluntary retirement, has to be mentioned under the Salary/Pension section, while family pension, which is granted to the widow / widower and where there is no widow / widower to the children of a government servant, has to be mentioned under Income from Other Sources section in the income tax return (ITR1).
While the provisions of salary income would be applicable to retired employees, beneficiaries of family pension will get a deduction of 1/3 of the amount of family pension received, or Rs 15,000, whichever is less, admissible as per section 57(iia) of the Income Tax Act and has to be mentioned in the last row under Income from Other Sources section to get the benefit.
This benefit was available earlier as well. It’s only that this year, it has been specifically mentioned in the ITR-1 Form, says CA Karan Batra, Founder & CEO of CharteredClub.com.