TAXABILITY OF PENSION

People, who are working in government services or those working with government departments get pensions after retirement from their services. In addition to above those who have contributed towards Employee Provident Fund (EPF) also get pension under Employee Pension Scheme (EPS), 1995. Even after the death of the employee, their family members are also entitled to get the pension from the employer as well as under EPS.

Taxable Amount = Received Amount – Exempt Amount

Some employers contribute towards superannuation fund of employees so that they get pension after their retirement. From 2004, the government has shifted all its new joiners to New Pension System (NPS) where the amount of pension received by them is dependent on the amount contributed by them along with the employer to the NPS. Even self-employed can also contribute towards NPS account and get annuity after their retirement.

Generally the words pension and annuity are used interchangeably but strictly speaking the monthly amount received by an employee after retirement from his ex-employer or in connection with employment is called pension and periodical payments received from an insurance company on annuity policy is called annuity but such annuity is also referred to as pension.

Income Tax rules for such pension and annuity

  1. Pension received from ex-Employer

For those employees who receive pension from their ex-employer is taxable under the head salaries. Therefore, it is not only the active employees whose salary are taxable under the head Salaries but also the pension receive by ex-employee is tax under the same head. Like Salaried employees, the pensioners are also entitled to the benefit of standard deduction available upto Rs. 40000/- every year, which has been introduced from this year, against the pension received by them.

You are entitled to commute certain portion of your pension and receive the present value of such commuted value of pension at the time of your retirement. For government employees and those working with government companies the entire value of commute pension is exempt. However, for other employees commuted value of 1/3 of pension is exempt in case the employee receives any gratuity. In case the employee does not receive any gratuity, he can commute pension upto 50% of the pension and claim the same as exempt.

  1. Pension received under superannuation policy or employee pension scheme

In case your employer had contributed towards superannuation fund or ha purchased superannuation policy for you, the pension received by your from the insurance company is taxable under the head Salary as it is received as a result of your employment. Even for the 1/3 of the commuted portion of pension receivable under the superannuation is fully exempt.

Likewise, the pension received by you under the EPS based on your contribution towards EPF is taxable in your hand. Since this pension is received because of your employment, you are entitled to claim standard deduction as discussed above.

  1. Family pension

Pension received by the dependent of an employee is called family pension and is taxable in the hands of the dependent recipient/s. However as the pension is not received due to services rendered by the dependent the same is taxable under the head “Income From Other Source”. However, the dependent person who receives the pension is entitled to claim a deduction of 1/3 of the pension received subject to a maximum of Rs. 15000/- against the deduction of Rs. 40000/- available to retired employees.

  1. Annuity received from insurance company on the annuity policy purchased by you

In order to ensure that you receive a certain sum at a fixed period, you can buy an annuity plan from an insurance company, which in turn will pay the agreed amount at the agreed interval, which is annuity but loosely, called pension. The amount of pension received under an annuity plan is taxable under the head “income from other Sources.” Since this amount does not have any co-relation with any employment, you are not entitled to claim standard deduction against this amount.

  1. Annuity received from annuity policy purchased on maturity of the NPS account.

The employees who have opted for NPS instead of EPF account have to mandatorily buy an annuity plan from an Indian insurance company for 40% of the accumulated corpus. The pension received by these employee should be taxable under the head Salaries but since the employee can continue to contribute to his NPS account even after he leaves his employment or even when he turns self-employed, it is doubtful whether in such situation the annuity received will become taxable under the head Salaries or it should be taxable under the head “Income From other Sources”. Likewise even a self-employed person can also contribute towards the NPS account and receive pension. Presently the income tax law does not have any clear-cut provision as to the head under which the annuity received for annuity policy bough on retirement should be taxed. In my opinion for the salaried, the pension should be taxable under the head Salaries and should be entitled for standard deduction upto Forty thousand rupees. However, since the law is silent on this aspect it is risky to offer it under the head Salaries for claiming the standard deduction. Additionally salaried and self-employed both can contribute additional fifty thousand to claim deduction under Section 80 CCD(1B) so the head under which the pension received will become taxable and whether one will be entitled to claim standard deduction is a grey area and clarificatory amendment of the law is needed to clear the clouds.

Deferred tax

Deferred tax refers to the tax effect of temporary differences between accounting income that is calculated by taking into consideration the provisions of Companies Act, 2013 and taxable income that is calculated by taking into consideration the provisions of Income Tax Act,1961.

Temporary Differences:

While calculating taxable income, certain expenses debited to Profit or Loss A/c are disallowed in one period and gets reversed in future period in accordance with provisions of the Income-tax Act. In the same manner, certain incomes credited in one period to Profit or Loss A/c form part of the income in future period. Such items are considered as temporary differences.

 

For example:

(i) In case of treatment of deferred revenue expenditure (say, advertisement expenses incurred in one year but the benefit of which extends in subsequent years also), the expenditure incurred is amortised over a period of time but as per tax laws, it is allowed wholly in first year in which such deferred revenue expenditure is made.

(ii) In case of advance incomes received (say, advance rent), the disclosure of same is mandatory for the purpose of calculating taxable income. However, this income is recognized in the books of account when actually earned.

(iii)       In case of different book and tax depreciation which could arise due to difference in depreciation rates or methods of calculating depreciation i.e. SLM or WDV or differences in composition of actual cost of assets.

(iv) In case of provisions made in anticipation of liabilities where the liability is allowed in the subsequent period when it crystalizes.

Deferred Tax Accounting:

The accounting, presentation and disclosure of deferred tax is carried out as per the provisions of “Accounting Standard- 22” (i.e., Accounting for Taxes on Income) or “Ind AS- 12” (i.e., Income Taxes). Deferred tax asset or deferred tax liability is created by debiting/crediting Statement of Profit and Loss.

The following table shows different cases where deferred tax asset/ liability is required to be created:

CASES DEFERRED TAX ASSET/ LIABILITY
Book Profit > Taxable Profit Deferred Tax Liability (DTL)
Book Profit < Taxable Profit Deferred Tax Asset (DTA)

Deferred Tax Asset/ liability in case of LOSS:

Due to differences in income as per financial books and taxable profit as per tax laws, there is a certainty that one book reflects loss and other shows profit. In that case, the following treatment shall be made:

 

CASES DEFERRED TAX ASSET/ LIABILITY
Loss as per books of accounts and Profit as per tax laws (Subject to the principles of prudence) Deferred Tax Asset (DTA)
Loss as per tax laws and Profit as per books of account (MAT has to be paid) Deferred Tax Liability (DTL)

Deferred Tax Computation Rate:

The deferred tax asset/liability is calculated at the normal rate of tax.

Deferred Tax Asset Accounting:

Deferred Tax Asset (DTA) account is created by crediting Profit & Loss Account. The following journal entry is required to be passed.

Deferred Tax Asset A/C……………. Dr

To Profit & Loss A/C……………………..….

Deferred Tax Liability Accounting:

Deferred Tax Liability (DTL) account is created by crediting Profit & Loss Account. The following journal entry is required to be passed.

Profit & Loss A/C ……………. Dr

To Deferred Tax Liability A/C ………..…….

 

ITD Warns Salaried Class Against Filing Wrong Returns

Income Tax Department Warns Salaried Class Against Filing Wrong Returns

The Income Tax Department on Wednesday cautioned salaried class taxpayers against using illegal means like under-reporting of income or “inflating” deductions while filing their returns, stating violators will be prosecuted and their employers will be intimated to take action against them.

The Central Processing Centre (CPC) of the Department in Bengaluru, that receives and processes the Income Tax Returns (ITRs), has issued an advisory specifying such taxpayers should not “fall prey” to unscrupulous tax advisors or planners who help them in preparing wrong claims to get tax benefits.

Calling it a “cautionary advisory” on reports of Tax evasion by under-reporting of income or inflating deductions or exemptions by salaried taxpayers, the department said such attempts “aided and abetted by unscrupulous intermediaries have been noted with concern”.

“Such offences are punishable under various penal and prosecution provisions of the Income Tax Act,” it said.

The advisory comes in the backdrop of the investigation wing of the department, in January, unearthing a racket of extracting fraudulent tax refunds by employees of bellwether information technology companies based in Bengaluru, in alleged connivance with a tax advisor.

The CBI recently registered a criminal case to probe this nexus.

The tax filing season for salaried class taxpayers has just begun with the Central Board of Direct Taxes (CBDT), that frames policy for the department, recently notifying the new ITRs.

The one-page advisory added that if the department notices any fraudulent claims in their ITRs, such claims “may be punishable under provisions of the IT Act and this may also delay issuance of their refunds.”

“Taxpayers, are, therefore strictly advised not to fall prey to false promises or mis-advice by unscrupulous intermediaries and submit wrong claims in their ITRs, which would be treated as cases of tax evasion. In the cases of such wrong claims by the government/PSU employees, reference would be made to the concerned vigilance division for action under conduct rules,” it added.

The advisory added that the department possesses an “extensive risk analysis system” that is aimed at identifying persons who are non-compliant and aim to subvert the trust based-system “envisioned” while processing of ITRs at the CPC, which it said is automated and devoid of any human interface.

“In all such cases of high risk , the department may examine and verify the details submitted by taxpayers in their ITR subsequent to the processing of returns,” it said.

It also asked tax planners and advisors to “confine their advice to taxpayers within the four corners of the IT Act” and warned that the violators will be prosecuted and such instances will also be referred to enforcement agencies like the CBI and the Enforcement Directorate (ED) for criminal prosecution.

Know about LLP- Limited Liability Partnership

1. Annual Return – FORM 11 – 60 days – 30th May, 2018
2. Statement of Accounts – FORM 8 – 30TH OCTOBER, 2018
3. INCOME TAX RETURN:
IF NO AUDIT- 31ST JULY
IF AUDIT – 30TH SEPTEMBER
STATUTORY AUDIT : Capital Contribution – 25 lakh or Annual Turnover – 40 Lakh
Mandatory Certificate from PCS – Annual Turnover – 5 crore or Contribution – 50 Lakh
Penalty – 100 Rs per day.
LLP can’t be close without making compliance good.

The words of Sir Maurice Gwyer In re the Central Provinces and Berar Act XIV of 1938 the learned JJ said–

“Subject always to the legislative competence of the taxing authority, a duty on home-produced goods will obviously be imposed at the stage which the authority find to be the most convenient and the most lucrative, wherever it may be; but that is a matter of the machinery of collection, and does not affect the essential nature of the tax”