The Central Board of Direct Taxes (CBDT) has clarified that the pension received by a taxpayer from his former employer is taxable under the head “Salaries”. The Finance Act, 2018 has amended Section 16 of the Income–tax Act, 1961(“the Act”) to provide that a taxpayer having income chargeable under the head “Salaries” shall be allowed a deduction of ₹ 40,000/- or the amount of salary, whichever is less, for computing his taxable income. Accordingly, any taxpayer who is in receipt of pension from his former employer shall be entitled to claim a deduction of ₹ 40,000/- or the amount of pension, whichever is less, under Section 16 of the Act.  

Earlier, the representations were received seeking clarification as to whether a taxpayer, who receives pension from his former employer, shall also be eligible to claim this deduction.

Standard deduction applies to pension from a former employer, permitting a salaried deduction under Section 16. Pension from a former employer is taxable under the Salaries head and is eligible for the standard deduction under the amended provision, allowing the taxpayer to reduce taxable income by the prescribed deduction or by the amount of pension, whichever is less, when computing income chargeable under Salaries.