Family pension is a payment received by the legal heirs of a deceased employee as a periodic income. Under the Income Tax Act, 1961, family pension is taxable under the head ‘Income from Other Sources.’ The Act provides specific provisions to ensure the fair taxation of this income while allowing certain deductions.

Taxability of Family Pension

1. Head of Income:
   • Family pension is taxed under ‘Income from Other Sources,’ as the recipient is not rendering any services to earn it.
2. Applicable Tax Rate:
   • Family pension is added to the recipient’s total income and taxed at their applicable income tax slab rate.
3. Tax Year:
   • The pension is taxable in the year it is received.

Deductions Allowed Under Section 57(iia)

To reduce the tax burden, the Income Tax Act provides a standard deduction for family pension income:

1. Deduction Amount:
   • The recipient can claim a deduction of 33.33% of the family pension or ₹15,000, whichever is lower.
2. Illustration:
   • Mr. A receives ₹60,000 as annual family pension. The deductible amount is:
     • 33.33% of ₹60,000 = ₹20,000
     • Maximum deduction allowed = ₹15,000
     • Taxable income = ₹60,000 – ₹15,000 = ₹45,000

Examples of Tax Treatment

1. Example 1: Full Deduction Applied:
   • Ms. B receives ₹30,000 as family pension:
     • 33.33% of ₹30,000 = ₹10,000
     • Deduction allowed = ₹10,000 (lower than ₹15,000 cap)
     • Taxable income = ₹30,000 – ₹10,000 = ₹20,000
2. Example 2: Deduction Capped at ₹15,000:
   • Mr. C receives ₹1,00,000 as family pension:
     • 33.33% of ₹1,00,000 = ₹33,333
     • Deduction allowed = ₹15,000 (cap applied)
     • Taxable income = ₹1,00,000 – ₹15,000 = ₹85,000

Exemptions and Special Cases

1. Family Pension Received by Government Employees:
   • Family pension received by the family of armed forces personnel, including para-military forces, is exempt from tax under certain conditions.
2. Compassionate Allowance:
   • Any lump-sum ex-gratia payment made by the employer at the time of the employee’s death is exempt under Section 10(10C).

Compliance Tips for Taxpayers

1. Maintain Documentation:
   • Retain copies of the death certificate, employer’s communication, and pension details.
2. Claim Deductions Accurately:
   • Ensure that the deduction claimed under Section 57(iia) does not exceed the permissible limit.
3. Report Income Transparently:
   • Disclose family pension income in the income tax return under the correct head.

Judicial Precedents

In CIT vs. Late Shri H. E. Dr. M. N. Mehta (2013), the court clarified that family pension is taxable under ‘Income from Other Sources’ and the recipient is entitled to the deduction under Section 57(iia).

Conclusion

Family pension income is taxable under ‘Income from Other Sources,’ with a standard deduction to provide relief to recipients. Legal heirs receiving family pension must report this income accurately and claim the permissible deductions to optimize their tax liability.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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