Commutation of Pension

[sagar singh]

Commutation is forward borrowing of pension for 15 years, presently at 8% rate of interest. The amount of EMI is fixed by the percentage of pension you commute, then the amount you receive is further depressed by an acturial statistic to cater for an early demise. You would note that the amount to receive will reduce with age.

Since the rate of interest on your own savings have now gone down to below 8%, you would actually be losing money when you commute your pension; since your investment will be less than what you are now been charged. However, in case of your passing away, EMI on account of competition will not be charged to your NOK.

If you are a recipient of a gallantry allowance (i.e., for any award of SM or gallantry or above), or in receipt of disability element, your entire pension is exempt from tax. In such cases, you will be losing money if you commute and then deposit the commuted amount in any fixed deposit, since the interest will be taxable. 

In other cases, there are pros and cons, e.g. the assurance that in case of an early demise your wife would get to retain the commuted amount.

Under the present circumstances, it helps to commute only if you need the money as a lump sum amount; or have an avenue to invest and receive interest of more than 8%.

To answer the secondary questions:

– The amount commuted is not taxed at source. However any interest that accrues on investing it is taxed.

- The EMI potion is never stated separately. Thus, there is no exemption on this account.

The explanation given above is complete in itself.

Insurance benefit  of commutation

This benefit can actually be made up by ensuring yourself for an amount equal to the amount that is commuted. 

For instance, a colonel retiring today with a pension of approximately Rs.1 lakh would receive a commuted amount of Rs 5176200. 

Insurance on this amount till 75 years of age as worked out online is Rs.27,000 approximately.

If one had received Rs.6 lakh which is The commuted amount at the 50%, One would have had to pay a tax of approximately 85000 on this  (say 31% approx) Hence, where the entire pension is tax-free, it is definitely cheaper to go in for a term insurance. 

Where the pension is not tax-free, it amounts to a loading of approximately 4.5% as insurance, considering the commuted amount to be six lakh rupees per annum. Please note that this insurance amount has already been factored into the table of commutation by decreasing the amount received with age. Am sending the table again after this message for reference.

Q. The insurance amount is yearly ? Can it be factored for tax deduction ?

"Tax deduction under Section 80C is available. ... Tax exemption under Section 10(10D) is available, subject to premium not exceeding 10% of the Sum Assured in any of the years during the term of the policy. Tax benefits, are as per the Income Tax laws & are subject to change from time to time."

Regards Sagar 

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