Commuted pension tax treatment: part exempt, part taxable; exemption reduced where gratuity is received.
Uncommuted pension is fully taxable as salary; commuted pension is partly exempt and partly taxable. Compute a notional full pension value from the commuted payment and apply an exemption fraction: if no gratuity is received, one half of the notional full pension value is exempt; if gratuity is received, one third is exempt. The remainder of the commuted payment is chargeable to tax as salary and must be added to taxable uncommuted pension to determine total taxable pension income.