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Economic Times
2 days ago
- Business
- Economic Times
Has the penal interest increased from 1% to 3% on advance tax payment in the new income tax bill 2025? Here's what CAs say
ET Online Advance tax Income Tax Bill, 2025 The Lok Sabha Select Committee recommended correcting a drafting error regarding how interest is calculated for shortfalls in advance tax payments. The revised Income Tax Bill 2025 that was introduced in the parliament yesterday (August 11, 2025) had a drafting error that stated:'the assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month, for the period….'. The select committee proposed that the penal interest for these shortfalls should be set at 3% for the first three installments and then drop to 1% for the final installment. So essentially there is no change to the advance tax shortfall interest law as outlined in the Income Tax Act, 1961 and New Income Tax Bill, 2025. What did the Lok Sabha Select Committee say in the corrigendum? As per the Lok Sabha Select Committee Corrigendum, this is what the select committee said:Page 447, for lines 18 to 42, —substitute—'425. (1)Where in any tax year, an assessee, liable to pay advance tax under section 404, other than the assessee mentioned in sub-section (3), has failed to pay such tax, or the advance tax paid by the assessee on its current income on or before the date specified in column B of the Table below, is less than advance tax due on returned income, as specified in column C, then the assessee shall be liable to pay interest on the amount of Shortfall of advance tax as specified in column D, at the rate of interest specified in column corrigendum Source: CORRIGENDUM What does this mean for taxpayers? ET Wealth Online reached out to CAs to clarify the meaning of this corrigendum, and here's what they said: Chartered Accountant Prakash Hegde, says: "Under section 234C of the Income Tax Act, 1961 , the taxpayer who delays the payment of Advance Tax due for the first three instalments (i.e. instalments which are due on 15th June, 15th September and 15th December) even by a single day, is required to pay interest for 3 months i.e. 3% of the amount of Advance Tax due for that instalment. The interest remains at 3% even if the Advance Tax due for an earlier instalment is paid on or before the next instalment. In the Income Tax (No. 2) Bill, 2025, in Clause 425, for the first three instalments it was mentioned that the 'interest shall be chargeable at 1% per month for 3 months, or the period of default, whichever is less' which means that a taxpayer would pay interest only for the period of default. This means that interest payable could be 1% or 2% or 3% depending on the date of actual would have helped the taxpayer to pay a lesser amount of interest if he pays early which was justifiable and equitable. However, now through the Corrigendum dated 11 August 2025, Clause 425 has been substituted to make the rate of interest exactly in line with the Act, i.e. regardless of the date of payment of the Advance Tax due for the first 3 instalments, if there has been any delay even by a day, the interest payable shall be 3%." Chartered Accountant (Dr.) Suresh Surana says: 'The corrigendum does not imply that the penal interest on advance tax has been tripled across all periods.' Surana explains: 'Under the original draft of the Income-tax Bill, 2025, the interest for shortfall in payment of advance tax was prescribed at 1% per month, similar to the provisions of section 234C of the current Income-tax Act, 1961. The corrigendum replaces this with a revised table, whereby for instance, the interest on shortfall in advance taxes for the first three installments, i.e., those due on 15th June, 15th September and 15th December, is levied at a flat rate of 3% for the respective period of shortfall in advance taxes. The interest on shortfall for the last instalment due on 15th March remains at 1%. It is important to note that the 3% is a one-time levy for the relevant instalment period and not a monthly rate. Surana says: 'Thus, while the original Bill prescribed a simple interest of 1% per month for each quarter on the shortfall in advance tax, the corrigendum consolidated this into a flat levy of 3% for the quarterly installments,which equates to the same overall interest cost for the respective relevant quarter. Accordingly, there is no substantive change in the effective interest burden; the amendment is primarily a change in the manner of computation and presentation.'Surana says: Clause 425 of the Bill (corresponding to Section 234C of the IT Act) provides for interest for deferment of advance tax. There are no changes in the interest rate under this clause. The provisions of the existing section have been textually simplified by providing a tabular format to calculate the interest for deferment of advance tax for easy understanding and simple calculation. The interest rate of 1% per month for a three-month period remains unchanged, but the revised format aims to simplify the process, improving clarity and ease of calculation. In essence, while the underlying interest rate and the basis for its calculation have not altered, the presentation has been simplified for better understanding. This approach retains the core principles of the IT Act, with a focus on ensuring compliance while providing taxpayers with a more user-friendly method of computing their obligations. Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, says: Assume your total advance tax liability for the year is Rs 500,000. Under the law, you must pay 15% (Rs 75,000) by 15 June and 45% cumulatively (Rs 225,000) by 15 September. Suppose you pay only Rs 50,000 by 15 June. This results in a shortfall of Rs 25,000 for the June instalment. Interest is calculated at 1% per month for three months on the shortfall, i.e., Rs 25,000 × 1% × 3 months = Rs 750, with the three months running from 16 June to 15 15 September, your cumulative payment should have reached Rs 225,000, but you have paid only Rs 170,000. This again leaves a shortfall of Rs 55,000. Interest is again charged at 1% per month for three months on this shortfall, i.e., Rs 55,000 × 1% × 3 months = Rs 1,650, for the period 16 September to 15 December. In total, the interest payable for these two shortfalls is Rs 2, illustrates that the '3%' in the provision is simply 1% per month for three months for each instalment shortfall, exactly as under the old Income-tax Act, 1961. In summary, if there is a shortfall in remittance of advance tax even for a day beyond the statutory quarterly due date, interest is charged for a minimum of 3 months. Mihir Tanna, associate director, S.K Patodia LLP, says: In the Income Tax (no.2) Bill 2025 introduced in Lok Sabha, Section 425 specifies the provisions for interest liability in the case specified taxpayer failed to pay advance tax. To make it easy to understand, provisions of existing Sec 234C of Income Tax Act 1961 are simplified and presented in tabular form. Also the word "....Interest at the rate of one percent per month...." is presented as "3%" Interest payable on shortfall. Thus, it can be observed that there is no change in the provisions. Earlier also if the taxpayer doesn't pay advance tax on or before the specified due date, he/she was liable for interest for 1%*3 months. For example, a person has earned business income today on 12th August and didn't pay advance tax on the last due date (i.e. 15th June); in that case the taxpayer is liable for interest for the entire 3 months (i.e. July to Sep). If the taxpayer pay advance tax today on 12th August or any time before 15th Sep; taxpayer will not be liable for interest for 3 months (i.e. October to December). Further, relief is provided for income which can not be estimated in advance like capital gain, dividend etc. For such income, interest will not be applicable if advance tax is paid in the subsequent due date of advance. N.R. Narayana Murthy Founder, Infosys Watch Now Harsh Mariwala Chairman & Founder, Marico Watch Now Adar Poonawalla CEO, Serum Institute of India Watch Now Ronnie Screwvala Chairperson & Co-founder, upGrad Watch Now Puneet Dalmia Managing Director, Dalmia Bharat group Watch Now Martin Schwenk Former President & CEO, Mercedes-Benz, Thailand Watch Now Nadir Godrej Managing Director, of Godrej Industries Watch Now Manu Jain Former- Global Vice President, Xiaomi Watch Now Nithin Kamath Founder, CEO, Zerodha Watch Now Anil Agarwal Executive Chairman, Vedanta Resources Watch Now Dr. Prathap C. Reddy Founder Chairman, Apollo Hospitals Watch Now Vikram Kirloskar Former Vice Chairman, Toyota Kirloskar Motor Watch Now Kiran Mazumdar Shaw Executive Chairperson, Biocon Limited Watch Now Shashi Kiran Shetty Chairman of Allcargo Logistics, ECU Worldwide and Gati Ltd Watch Now Samir K Modi Managing Director, Modi Enterprises Watch Now R Gopalakrishnan Former Director Tata Sons, Former Vice Chairman, HUL Watch Now Sanjiv Mehta Former Chairman / CEO, Hindustan Unilever Watch Now Dr Ajai Chowdhry Co-Founder, HCL, Chairman EPIC Foundation, Author, Just Aspire Watch Now Shiv Khera Author, Business Consultant, Motivational Speaker Watch Now Nakul Anand Executive Director, ITC Limited Watch Now RS Sodhi Former MD, Amul & President, Indian Dairy Association Watch Now Anil Rai Gupta Managing Director & Chairman, Havells Watch Now Zia Mody Co-Founder & Managing Partner, AZB & Partners Watch Now Arundhati Bhattacharya Chairperson & CEO, Salesforce India Watch Now
Time of India
2 days ago
- Business
- Time of India
Has the penal interest increased from 1% to 3% on advance tax payment in the new income tax bill 2025? Here's what CAs say
What did the Lok Sabha Select Committee say in the corrigendum? Academy Empower your mind, elevate your skills corrigendum What does this mean for taxpayers? 'Under the original draft of the Income-tax Bill, 2025, the interest for shortfall in payment of advance tax was prescribed at 1% per month, similar to the provisions of section 234C of the current Income-tax Act, 1961. The corrigendum replaces this with a revised table, whereby for instance, the interest on shortfall in advance taxes for the first three installments, i.e., those due on 15th June, 15th September and 15th December, is levied at a flat rate of 3% for the respective period of shortfall in advance taxes. The interest on shortfall for the last instalment due on 15th March remains at 1%. It is important to note that the 3% is a one-time levy for the relevant instalment period and not a monthly rate. In the Income Tax (no.2) Bill 2025 introduced in Lok Sabha, Section 425 specifies the provisions for interest liability in the case specified taxpayer failed to pay advance tax. To make it easy to understand, provisions of existing Sec 234C of Income Tax Act 1961 are simplified and presented in tabular form. Also the word "....Interest at the rate of one percent per month...." is presented as "3%" Interest payable on shortfall. Thus, it can be observed that there is no change in the provisions. Earlier also if the taxpayer doesn't pay advance tax on or before the specified due date, he/she was liable for interest for 1%*3 months. For example, a person has earned business income today on 12th August and didn't pay advance tax on the last due date (i.e. 15th June); in that case the taxpayer is liable for interest for the entire 3 months (i.e. July to Sep). If the taxpayer pay advance tax today on 12th August or any time before 15th Sep; taxpayer will not be liable for interest for 3 months (i.e. October to December). Further, relief is provided for income which can not be estimated in advance like capital gain, dividend etc. For such income, interest will not be applicable if advance tax is paid in the subsequent due date of advance. The Lok Sabha Select Committee recommended correcting a drafting error regarding how interest is calculated for shortfalls in advance tax payments. The revised Income Tax Bill 2025 that was introduced in the parliament yesterday (August 11, 2025) had a drafting error that stated:'the assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month, for the period….'.The select committee proposed that the penal interest for these shortfalls should be set at 3% for the first three installments and then drop to 1% for the final essentially there is no change to the advance tax shortfall interest law as outlined in the Income Tax Act, 1961 and New Income Tax Bill, per the Lok Sabha Select Committee Corrigendum, this is what the select committee said:Page 447, for lines 18 to 42, —substitute—'425. (1)Where in any tax year, an assessee, liable to pay advance tax under section 404, other than the assessee mentioned in sub-section (3), has failed to pay such tax, or the advance tax paid by the assessee on its current income on or before the date specified in column B of the Table below, is less than advance tax due on returned income, as specified in column C, then the assessee shall be liable to pay interest on the amount of Shortfall of advance tax as specified in column D, at the rate of interest specified in columnSource: CORRIGENDUMET Wealth Online reached out to CAs to clarify the meaning of this corrigendum, and here's what they said:"Under section 234C of the Income Tax Act, 1961 , the taxpayer who delays the payment of Advance Tax due for the first three instalments (i.e. instalments which are due on 15th June, 15th September and 15th December) even by a single day, is required to pay interest for 3 months i.e. 3% of the amount of Advance Tax due for that instalment. The interest remains at 3% even if the Advance Tax due for an earlier instalment is paid on or before the next the Income Tax (No. 2) Bill, 2025, in Clause 425, for the first three instalments it was mentioned that the 'interest shall be chargeable at 1% per month for 3 months, or the period of default, whichever is less' which means that a taxpayer would pay interest only for the period of default. This means that interest payable could be 1% or 2% or 3% depending on the date of actual would have helped the taxpayer to pay a lesser amount of interest if he pays early which was justifiable and equitable. However, now through the Corrigendum dated 11 August 2025, Clause 425 has been substituted to make the rate of interest exactly in line with the Act, i.e. regardless of the date of payment of the Advance Tax due for the first 3 instalments, if there has been any delay even by a day, the interest payable shall be 3%."'The corrigendum does not imply that the penal interest on advance tax has been tripled across all periods.'Surana explains:Surana says: 'Thus, while the original Bill prescribed a simple interest of 1% per month for each quarter on the shortfall in advance tax , the corrigendum consolidated this into a flat levy of 3% for the quarterly installments,which equates to the same overall interest cost for the respective relevant quarter. Accordingly, there is no substantive change in the effective interest burden; the amendment is primarily a change in the manner of computation and presentation.'Mihir Tanna, associate director, S.K Patodia LLP, says:
News18
2 days ago
- Business
- News18
Explained: How The Latest Tax Bill 2025 Changes House Property Income Rules
Last Updated: Revised Income Tax Bill clarifies 30% deduction post-municipal tax and extends pre-construction interest benefit to let-out homes New Income Tax Bill 2025: Clause 22 of the revised New Income Tax Bill, 2025, has addressed two long-pending ambiguities in the taxation of 'Income from House Property." 1. Standard Deduction Clarification The Bill now explicitly states that the 30% standard deduction will be calculated on the net annual value—that is, after deducting municipal taxes from the annual value determined under Clause 21. In the earlier draft, it was unclear whether the deduction applied before or after municipal tax deduction, raising concerns it could be taken on the gross annual value. The Lok Sabha Select Committee recommended this amendment to preserve fairness and align the new law with existing provisions under Sections 23 and 24 of the Income-tax Act, 1961. Under current law, interest on borrowed capital for acquiring or constructing a property can be claimed as a deduction, including pre-construction interest spread over five equal annual instalments. This benefit applies to both self-occupied and let-out properties. What It Means for Homeowners Tax experts say these clarifications prevent potential disputes and ensure the computation process remains consistent with long-established practice. Experts Take: Chartered Accountant Abhishek Soni, co-founder of Tax2Win, said: 'A let-out house property is one that is rented out or leased to another party. The rental income from such a property is taxable under 'Income from House Property'. Individuals can claim tax deductions on municipal taxes paid, standard deduction (30% of net annual value), and interest on home loans." CA (Dr.) Suresh Surana explained to The Economic Times: Under the current Income-tax Act, 1961, Sections 23 and 24 govern the computation of 'Income from House Property." Section 23 allows municipal taxes actually paid to be deducted from the annual value to arrive at the net annual value, and Section 24(a) allows a standard deduction of 30% on this net value. However, the original draft of the Income-tax Bill, 2025, did not clarify whether the 30% deduction was to be applied before or after municipal taxes, raising concerns it might be calculated on gross annual value. The Select Committee's recommendation now ensures the 30% standard deduction applies to the annual value after municipal taxes—aligning with existing practice. About the Author Aparna Deb Aparna Deb is a Subeditor and writes for the business vertical of She has a nose for news that matters. She is inquisitive and curious about things. Among other things, financial markets, economy, More Stay updated with all the latest business news, including market trends, stock updates, tax, IPO, banking finance, real estate, savings and investments. Get in-depth analysis, expert opinions, and real-time updates—only on News18. Also Download the News18 App to stay updated! view comments First Published: Disclaimer: Comments reflect users' views, not News18's. Please keep discussions respectful and constructive. Abusive, defamatory, or illegal comments will be removed. News18 may disable any comment at its discretion. By posting, you agree to our Terms of Use and Privacy Policy.
Time of India
3 days ago
- Business
- Time of India
Latest version of new tax bill, 2025 clarifies two key laws on income from house property
Here's what the new version of the bill states: (a) 30% of the annual value as determined under section 21; (b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital; (c) where the capital referred to in clause (b) is borrowed during any period prior to the tax year in which the property has been acquired or constructed, the amount of any interest payable for the said prior period in five equal instalments for the said tax year and for each of the four immediately succeeding tax years What does this mean for homeowners? Under the current Income Tax Act, 1961, homeowners can claim deductions for municipal taxes, a 30% standard deduction (post municipal taxes), and interest on home loans, including a pre-construction interest. Loss from house property can be set off against other income up to Rs 2 lakh in the year of loss, with the balance carried forward for 8 years. The New Direct Tax Bill, 2025 retains similar provisions but is unclear on two aspects: whether calculation of the 30% deduction is after municipal taxes and availability of deduction of pre-construction interest for let-out properties. The Lok Sabha Select Committee, in its July 21, 2025 report, has recommended clarifying both these aspects. Adoption of these would align the new regime with existing provisions. Particulars Amount (Rs) Gross Annual Value of the house property XXX (less) Municipal Tax (XX) Net Annual Value of the house property XXX (Less) Deductions under Section 24: Standard deduction@30% Interest paid on home loan (XXX) Income from house property XXX Clause 22 of the latest version of the New Income Tax Bill, 2025 has clarified two key laws relating to taxation of income from house property . The first clarification is regarding standard deduction of 30% from the annual value of a residential house property . The second clarification is about availability of tax deduction for pre-construction interest for home loan taken for construction of a the earlier version of the bill, this tax deduction for pre-construction interest and standard deduction were not explicitly clarified. Therefore, the Lok Sabha Select Committee had said:'The Committee, after deliberations on Clause 22, identified the need to clarify the computation of deductions to enhance fairness and transparency for property owners. The Committee, recommend two key amendments: firstly, in Clause 22(1)(a), to explicitly state that the standard 30% deduction is computed on the annual value after deducting municipal taxes; and secondly, in Clause 22(2), to ensure the deduction for pre-construction interest is available for let-out properties in addition to selfoccupied ones, aligning it with the existing Act. Further, the Committee accept the remaining provisions of Clause 22 as proposed in the Bill.'22. (1) The income under the head 'Income from house property' shall be computed after making the following deductions:––If you are a homeowner who bought a residential property by taking a home loan from a financial institution, you can claim some tax deductions on both the principal and the interest components of the loan. The amendments proposed by the Select Committee relate to a situation where you have put your house bought on loan on rent (let-out).Chartered Accountant Abhishek Soni, co-founder, Tax2Win explains: 'A let-out house property is one that is rented out or leased to another party. The rental income received from such a property is taxable under the heads of income – "Income from House Property." Individuals can claim tax deductions on the municipal taxes paid, standard deduction (30% of the net annual value), and interest on home loans.'Ashish Agrawal, Partner, Dhruva Advisors LLP, says:Source: Tax2Win
Economic Times
07-08-2025
- Business
- Economic Times
No more partial treatment to pensioners when it comes to commutation of pension in the New Income Tax Bill, 2025
ET Online Good news for pensioners: Equitable tax treatment of pensioners likely in the new income tax bill 2025; Here's what the Lok Sabha Select Committee proposed Good news for pensioners as the Lok Sabha Select Committee identified a gap in the tax treatment of commuted pension for different types of recipients and thus recommended fixing it in the Direct Income Tax Bill, 2025. The issue was that the tax treatment for commuted pension was not equitable i..e same for all types of pensioners. For government employees commuted pension was fully exempt from tax, for private sector employees it was partially exempt from tax and for non-employees no tax exemption or deduction was even available. This unequal treatment is now proposed to be fixed. Non-employee pensioners can also include employees contributing to a pension plan outside of their employment like LIC Pension Fund, etc. Read below to know the full details. What did the Lok Sabha Select Committee say about commuted pension? In the Direct Tax Bill 2025, the Lok Sabha Select Committee said: Clause No 19: Deductions from salaries (Schedule VII) 'The Committee, after a careful review of Clause 19, identified a gap in the equitable tax treatment of commuted pension for different types of recipients. The Committee, therefore, recommended that a deduction for commuted pension, similar to that available to employees under Clause 19, be explicitly allowed under the head "Income from other sources" for non-employees who receive such pension from a fund. Accordingly, the Committee finds no further modifications are necessary for Clause 19 and recommend the acceptance of its remaining provisions as drafted.' Also read: No more higher tax on vacant property as recommended in New Income Tax Bill 2025 due to suggestions by select committee What does this mean? Commutation of pension means that the employee is getting a lump sum withdrawal from the pension Sharma, Company Secretary and Partner, Jotwani Associates explains what the proposed amendment in new tax bill 2025 is about: 'When non-employee category individuals received commuted pension from an approved fund, that income was taxed entirely under the head 'Income from other sources,' with no explicit provision for exemption or deduction. This created a disparity in tax treatment, wherein two individuals receiving identical pension benefits from similar sources are taxed differently solely on the basis of their employment status. Recognizing this inequity, the Committee has proposed that a parallel deduction be explicitly allowed under the heads of income 'Income from other sources' for non-employees who receive commuted pension from a fund set up by an insurer.' How does taxation of commuted pension works for private sector employees and what did the new tax bill 2025 say about them? Amarpal Chadha, Tax Partner, EY India, explains: 1. 'Currently, as per the provisions of Income Tax Act, 1961, any commuted pension received by Central/State Government employees or employees of local authority is exempt from tax. In case of employees of any other employer (private), the exemption would be as follows: In case the employee receives gratuity – 1/3rd of commuted value of pension is exempt In any other case – 1/2 of the commuted value of pension is exempt 2. Furthermore, any payment in commutation of pension received from an IRDA approved pension scheme of a life insurance company is also tax exempt. This covers both salaried employees and non-employees like professionals, self-employed persons, explains: 'In the Income tax Bill 2025, it was proposed to continue the exemption (by way of deduction from salary income) for commutation of pension received from IRDA approved pension scheme for salaried employees only. The Select Committee has, therefore, recommended to extend similar tax exemption to non-employees by way of specific deduction under 'Income from other sources' head. This will clear any ambiguity on taxation of such receipts (which, in any case, is a capital receipt) in the hands of non-employees.' Chartered Accountant Suresh Surna agrees with Chadha and adds: 'For all other recipients, including non-employees and those not covered by the specified schemes, the Direct Tax Bill 2025 now provides a full deduction under Section 93(1)(g) for the entire amount received in commutation of pension.' Who are considered as non-employees for the purpose of commuted pension under new tax bill 2025? Surana explains that in the context of Clause 93(1)(g) of the Income-tax Bill, 2025, the term 'non-employees' may reasonably extend to include individuals such as private sector employees whose employers do not operate a pension scheme or fund, but who have independently invested in an approved pension fund such as the LIC Pension Fund or similar notified funds under clause 10 (23AAB) of the Income-tax Act, to Sharma, non-employees in the context of the tax bill 2025 can mean independent professionals, legal heirs, nominees, or other recipients who are not in an employer-employee relationship with the pension contributing organization. Sharma explains: 'The Committee's recommendation is instead focused on non-employees—individuals who receive commuted pension from an approved fund but are not employees of the organization responsible for setting up or funding the pension scheme. These could include dependents, nominees of deceased pensioners, or beneficiaries under a group insurance-linked pension plan who are not themselves in a contract of employment with the employer. In such cases, the pension income is currently taxed fully under the head 'Income from other sources' because there is no provision analogous to Section 10(10A) for them.' Which type of individual pensioners can benefit from this proposed amendment in tax treatment of commuted pension? According to Chartered Accountant Namrata Dedhia, 'This recommendation of the committee will benefit self-employed persons contributing to private pension funds and legal heirs of employees, where the pension is commuted, allowing exemptions similar to those available to employees.'Dedhia adds: 'Even if employed individuals contribute to private pension funds outside of their employment, the same would be taxable under the head "Income from Other Sources" and will be eligible for exemption, if commuted.' What are the different types of pension schemes that qualify as eligible pension schemes under the Income Tax Act? Sharma explains: 'Under the Income Tax Act, 1961, certain pension schemes are considered 'eligible' for the purpose of availing tax exemptions on commuted pension amounts under Section 10(10A).' According to Sharma, the three broad categories of pension are: Government: Pensions received by employees of the Central or State Government are fully exempt from tax when commuted, as per Section 10(10A)(i). This includes civil service retirees, armed forces personnel, and those directly employed under statutory departments or ministries. Since these employees serve the government directly, they receive full exemption without any limit on the quantum of the commuted pension. Pensions received by employees of the Central or State Government are fully exempt from tax when commuted, as per Section 10(10A)(i). This includes civil service retirees, armed forces personnel, and those directly employed under statutory departments or ministries. Since these employees serve the government directly, they receive full exemption without any limit on the quantum of the commuted pension. Private: For non-government employees, including those from the private sector, the exemption applies only if the pension is received from a recognized superannuation fund. These are employer-managed funds approved by the Commissioner of Income Tax under the Income Tax Rules, typically funded during an employee's tenure. As per Section 10(10A)(ii), if gratuity is also received, only one-third of the commuted pension is exempt; if gratuity is not received, one-half of the commuted amount is exempt. For non-government employees, including those from the private sector, the exemption applies only if the pension is received from a recognized superannuation fund. These are employer-managed funds approved by the Commissioner of Income Tax under the Income Tax Rules, typically funded during an employee's tenure. As per Section 10(10A)(ii), if gratuity is also received, only one-third of the commuted pension is exempt; if gratuity is not received, one-half of the commuted amount is exempt. Third-party self purchased pension: Under Section 10(10A)(iii), employees receiving pension from an approved pension fund set up by a life insurer (such as LIC or other registered insurers offering group pension schemes) are also eligible for exemption on the commuted portion, subject to specific conditions and approvals granted to the fund under the Income Tax Rules. Sharma explains that the National Pension System (NPS) is now widely recognized and specifically addressed in Sections 10(12A) and 10(12B), although it has a distinct treatment framework. He adds: 'While NPS is not directly covered under Section 10(10A), certain components such as lump-sum withdrawals do qualify for exemption.' Is there any other pension scheme apart from superannuation fund and NPS that a private sector employer can offer to its employees? According to Sharma, private sector employers have several options besides NPS and recognized superannuation funds to structure retirement and pension benefits for their employees, depending on their financial strategy and compliance explains: One commonly used retirement benefit is the Employees' Provident Fund (EPF), which is statutorily governed and includes a pension component known as the Employees' Pension Scheme (EPS). While the EPF itself serves as a lump sum savings corpus, the EPS provides monthly pension payments post-retirement, albeit in modest amounts. Employers may also opt for group annuity plans offered by life insurers such as LIC, ICICI Prudential, or HDFC Life. These can be structured as Defined Benefit Plans where the employer pays a bulk premium or annual contributions, and the insurer commits to paying a fixed or variable pension upon the employee's retirement. If the underlying fund is approved by the Income Tax Department, then the commutation of pension received under such schemes can be eligible for tax exemption under Section 10(10A)(iii). S. Sriram, Executive Partner, Lakshmikumaran & Sridharan Attorneys, agrees with Sharma and adds: 'A private sector employer can offer a private pension scheme to its employees. Private Pension programmes can be offered by non-employers also – for example, LIC can offer a pension scheme to its agents (who are not its employees), a hospital can offer a pension scheme to its non-employee visiting doctors, etc.. But taxability/ exemption on pension from such private plans would be subject to approval of the Scheme by the Income-tax Authorities.'Akhil Chandna, Partner & Global People Solutions Leader, Grant Thornton Bharat, agrees with Sriram and Sharma and adds: 'Apart from NPS and superannuation funds, private employers can also opt for corporate annuity plans and group retirement solutions offered by insurers. Additionally, employee pension schemes can also be managed through private trusts maintained by employers.' Pension given to PSU company employees falls under which category—government or others? Sharma explains: Employees of Public Sector Undertakings (PSUs), despite being part of government-owned companies, are not treated as government employees for the purposes of tax exemption under Section 10(10A)(i). This section is restricted to individuals who are directly employed by the Central Government, State Governments, or civil services. PSU employees, such as those working with BHEL, NTPC, ONGC, or LIC, are employed by corporate entities established under the Companies Act or through statutory bodies, and thus are categorized as 'other employees' under the Income Tax Act. Consequently, their commuted pensions fall under Section 10(10A)(ii). Can non-employees mean a private company employee whose employer does not have a pension fund, but that employee invested in an approved pension fund? Surana explains: Such individuals may not be classified as "employees" in relation to a pension-paying entity, but their pension receipts arise from self-funded or individually contracted pension schemes. As such, they fall outside the scope of Clause 19 and are instead covered under the general deduction mechanism introduced in Clause 93(1)(g). N.R. Narayana Murthy Founder, Infosys Watch Now Harsh Mariwala Chairman & Founder, Marico Watch Now Adar Poonawalla CEO, Serum Institute of India Watch Now Ronnie Screwvala Chairperson & Co-founder, upGrad Watch Now Puneet Dalmia Managing Director, Dalmia Bharat group Watch Now Martin Schwenk Former President & CEO, Mercedes-Benz, Thailand Watch Now Nadir Godrej Managing Director, of Godrej Industries Watch Now Manu Jain Former- Global Vice President, Xiaomi Watch Now Nithin Kamath Founder, CEO, Zerodha Watch Now Anil Agarwal Executive Chairman, Vedanta Resources Watch Now Dr. Prathap C. Reddy Founder Chairman, Apollo Hospitals Watch Now Vikram Kirloskar Former Vice Chairman, Toyota Kirloskar Motor Watch Now Kiran Mazumdar Shaw Executive Chairperson, Biocon Limited Watch Now Shashi Kiran Shetty Chairman of Allcargo Logistics, ECU Worldwide and Gati Ltd Watch Now Samir K Modi Managing Director, Modi Enterprises Watch Now R Gopalakrishnan Former Director Tata Sons, Former Vice Chairman, HUL Watch Now Sanjiv Mehta Former Chairman / CEO, Hindustan Unilever Watch Now Dr Ajai Chowdhry Co-Founder, HCL, Chairman EPIC Foundation, Author, Just Aspire Watch Now Shiv Khera Author, Business Consultant, Motivational Speaker Watch Now Nakul Anand Executive Director, ITC Limited Watch Now RS Sodhi Former MD, Amul & President, Indian Dairy Association Watch Now Anil Rai Gupta Managing Director & Chairman, Havells Watch Now Zia Mody Co-Founder & Managing Partner, AZB & Partners Watch Now Arundhati Bhattacharya Chairperson & CEO, Salesforce India Watch Now
