COMMUTATION OF PENSION - YES OR NO - VALUE
Whenever any retiring officer approaches us for advice, invariably the question of whether or not to commute the pension comes up. This article deals with this issue so that all officers, retired or retiring, would be able to make up their mind more knowledgeably.
Commutation is defined as giving up part or all of the pension payable from retirement in exchange for an immediate lump sum. Commutation factors (usually calculated by the Scheme Actuary) are used to determine the amount of pension which needs to be given up in order to provide the lump sum.
Before we take a call on the same, a few connected issues need to be understood clearly:- Basic Pension is exactly half of your last drawn Basic Salary. And Basic Salary for the purposes of pension calculations is Basic + Grade Pay + Rank Pay. Whenever commutation is done, only the Basic Pension gets commuted, never the DA received. Thus, after commutation also, the DA is received on full value of Basic Pension. Commutation can be done of any value from 0% to 50%. However,
generally almost all the officers get 50% commutation done, if they go in for it. Commutation is done based on a factor of commutation set by the Government which depends on the years of service that you’ve put in. To put it more simply, it is the time adjusted Present Value of your future pension. Pension is restored exactly 15 years after first commuted pension is received by you. Though not confirmed, probably commutation can still be done within one year of retirement, if the officer has not done commutation and wishes to change his decision. Now, let us understand the difference between a commuted pension and an uncommuted pension. We’ll understand it by an example.
Case Study - (6TH CPC Period))
The officer is a Col who has Rs 60,000 of Basic Pay, 8700 of Grade Pay and 6000 of Rank Pay, making it a total of Rs 74,700 of Basic Pay while serving. He will commute 50% of his pension, if he does so. He is in a dilemma what to do. A commutation factor of 8.88 is applicable to him. The DA is 119% at present. It means that he will be paid commutation value equivalent to 8.88 years (107 months) while he will continue to return the installment for 180 months catering for the rate of interest which Govt has fixed for present value of future payments.
If he commutes the pension: Monthly Pension received by him = Rs 18,675 (ie, 37,350/2) + 44,446 (ie, 119% of 37,350) = Rs 63,121. HOWEVER , In addition, he will receive, a bulk commuted pension amount of Rs 19.9 Lakhs (ie, 18,675 X 12 months X 8.88 factor).
Analysis of Commutation Vs Non-commutation:
If you see the calculations above, the difference between commuted pension ie Rs 81800/-and non-commuted monthly pension 0f Rs 63222/- since DA is paid on full pension is not much amounting to only Rs 18578/- , an additional amount to be received every month. He also gets a big sum of Rs 19.9 Lakhs in bulk. He would be able to generate long term returns of anything from 6% - 10% per annum net of interest, depending on where he invests his commuted amount keeping the safety of funds in view Rs 13270 per month at 8% simple interest leaving a gap of only Rs 5300/- between commuted and non- commuted pension.).. If he takes up re-employment or corporate job after retirement, for a few years, this small additional monthly amount will anyway not matter atall.
Commutation is better also due to following three reasons:-
If the Officer retires after 01 Jan 2016, then 7th CPC applicable to him:
7th pay commission has increase his serving basic pay by 2.57 times. Let us presume his last pay was 181200/- as per 7 cpc matrix plus MSP his Basic pension will be approx Rs 90,600 and hence if he does not commute the pension, he gets a Pension of Rs 90,600.plus DA.
If he commutes pension by 50%, his pension will be Rs 45,300 plus DA. And he gets a commuted amount of Rs 46.27 Lakhs.
Again, even with 7th pay commission effect, the gap between maximum commuted and non-commuted pension will not be much as bulk if he commutes by 50%.
7th CPC New Table for Commutation of Pension December 9, 2017
Our Recommendations
We strongly recommend that all officers should commute their pension to the maximum allowed 50%. If the officers are also able to invest their commuted pension bulk amount wisely and carefully, there is not likely to be any difference (or a minor difference) in their take-home pension even after commutation while still having this large commuted bulk amount with them as a big security.
5TH CPC TABLE - Commutation Tables for Central Government Employees effective from 1.3.1971 Table-1
Commutation Tables for Central Government Employees Effective from 1.1.2006
Table 2 : Commutation values for a pension of Rs. 1 per annum as per Sixth CPC recommendations, effective from 1.1.2006
IMPORTANT NOTES
Commuted value is the present value of the future series of cash flows required to fulfill a pension obligation. Commuted value is, therefore, the net present value of a future financial obligation. The total pension obligation is a product of long-term interest rates and life expectancy based on mortality tables. In other words it is the lump sum payout of the present value of an employee's earned pension. It is the money that would have to be invested today, based on current long-term interest rates and mortality rates, to generate monthly cash flows equivalent to the DB pension payment.
Is commutation of pension beneficial?
After commutation, only the basic pension is reduced for retired defence personnel, while they get the dearness relief (DR) benefits on the entire pension amount. ... The other added advantage of commutation is that while your pension would be taxable, the commuted lump sum amount is tax free.
Can family pension be commuted?
Pension received by a family member. Pension received by a family member is taxed under income from other sources in your Income Tax Return. If this pension is commuted or is a lump sum payment it is not taxable.Jul 20, 2018
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Whenever any retiring officer approaches us for advice, invariably the question of whether or not to commute the pension comes up. This article deals with this issue so that all officers, retired or retiring, would be able to make up their mind more knowledgeably.
Commutation is defined as giving up part or all of the pension payable from retirement in exchange for an immediate lump sum. Commutation factors (usually calculated by the Scheme Actuary) are used to determine the amount of pension which needs to be given up in order to provide the lump sum.
आगे पढ़ने के लिए नेचे क्लिक करें
Before we take a call on the same, a few connected issues need to be understood clearly:- Basic Pension is exactly half of your last drawn Basic Salary. And Basic Salary for the purposes of pension calculations is Basic + Grade Pay + Rank Pay. Whenever commutation is done, only the Basic Pension gets commuted, never the DA received. Thus, after commutation also, the DA is received on full value of Basic Pension. Commutation can be done of any value from 0% to 50%. However,
generally almost all the officers get 50% commutation done, if they go in for it. Commutation is done based on a factor of commutation set by the Government which depends on the years of service that you’ve put in. To put it more simply, it is the time adjusted Present Value of your future pension. Pension is restored exactly 15 years after first commuted pension is received by you. Though not confirmed, probably commutation can still be done within one year of retirement, if the officer has not done commutation and wishes to change his decision. Now, let us understand the difference between a commuted pension and an uncommuted pension. We’ll understand it by an example.
Case Study - (6TH CPC Period))
The officer is a Col who has Rs 60,000 of Basic Pay, 8700 of Grade Pay and 6000 of Rank Pay, making it a total of Rs 74,700 of Basic Pay while serving. He will commute 50% of his pension, if he does so. He is in a dilemma what to do. A commutation factor of 8.88 is applicable to him. The DA is 119% at present. It means that he will be paid commutation value equivalent to 8.88 years (107 months) while he will continue to return the installment for 180 months catering for the rate of interest which Govt has fixed for present value of future payments.
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| TABLE EFFECTIVE JAN 2006 |
His Basic Pension is = Rs 74,700 / 2 = Rs 37,350.
If he does not commute the pension:- Monthly Pension received by him = Rs 37,350 + (119% of 37,350) = Rs 81,800./-
If he commutes the pension: Monthly Pension received by him = Rs 18,675 (ie, 37,350/2) + 44,446 (ie, 119% of 37,350) = Rs 63,121. HOWEVER , In addition, he will receive, a bulk commuted pension amount of Rs 19.9 Lakhs (ie, 18,675 X 12 months X 8.88 factor).
Analysis of Commutation Vs Non-commutation:
If you see the calculations above, the difference between commuted pension ie Rs 81800/-and non-commuted monthly pension 0f Rs 63222/- since DA is paid on full pension is not much amounting to only Rs 18578/- , an additional amount to be received every month. He also gets a big sum of Rs 19.9 Lakhs in bulk. He would be able to generate long term returns of anything from 6% - 10% per annum net of interest, depending on where he invests his commuted amount keeping the safety of funds in view Rs 13270 per month at 8% simple interest leaving a gap of only Rs 5300/- between commuted and non- commuted pension.).. If he takes up re-employment or corporate job after retirement, for a few years, this small additional monthly amount will anyway not matter atall.
Commutation is better also due to following three reasons:-
(a) Difference between 50% commuted (maximum allowed) and uncommuted pension is not much on a per month basis. As such, for this officer and his wife, living in their own house, Rs 63,000 per month of commuted pension is normally quite adequate.
(b) The bulk amount is quite large. Apart from providing a big financial security, it can be prudently invested to generate the gap amount (between commuted and uncommuted monthly pension) while still retaining the bulk money with you in your kitty.
(c) In case something untoward happens to the officer, the Government pays the same pension to the family of commuted and uncommuted cases, thus effectively ‘forgetting’ the commuted pension bulk amount given to the officer. This is a large welfare measure by the Govt.
If the Officer retires after 01 Jan 2016, then 7th CPC applicable to him:
7th pay commission has increase his serving basic pay by 2.57 times. Let us presume his last pay was 181200/- as per 7 cpc matrix plus MSP his Basic pension will be approx Rs 90,600 and hence if he does not commute the pension, he gets a Pension of Rs 90,600.plus DA.
If he commutes pension by 50%, his pension will be Rs 45,300 plus DA. And he gets a commuted amount of Rs 46.27 Lakhs.
Again, even with 7th pay commission effect, the gap between maximum commuted and non-commuted pension will not be much as bulk if he commutes by 50%.
7th CPC New Table for Commutation of Pension December 9, 2017
Our Recommendations
We strongly recommend that all officers should commute their pension to the maximum allowed 50%. If the officers are also able to invest their commuted pension bulk amount wisely and carefully, there is not likely to be any difference (or a minor difference) in their take-home pension even after commutation while still having this large commuted bulk amount with them as a big security.
5TH CPC TABLE - Commutation Tables for Central Government Employees effective from 1.3.1971 Table-1
Commutation Tables for Central Government Employees Effective from 1.1.2006
Table 2 : Commutation values for a pension of Rs. 1 per annum as per Sixth CPC recommendations, effective from 1.1.2006
IMPORTANT NOTES
Commuted value is the present value of the future series of cash flows required to fulfill a pension obligation. Commuted value is, therefore, the net present value of a future financial obligation. The total pension obligation is a product of long-term interest rates and life expectancy based on mortality tables. In other words it is the lump sum payout of the present value of an employee's earned pension. It is the money that would have to be invested today, based on current long-term interest rates and mortality rates, to generate monthly cash flows equivalent to the DB pension payment.
Is commutation of pension beneficial?
After commutation, only the basic pension is reduced for retired defence personnel, while they get the dearness relief (DR) benefits on the entire pension amount. ... The other added advantage of commutation is that while your pension would be taxable, the commuted lump sum amount is tax free.
Can family pension be commuted?
Pension received by a family member. Pension received by a family member is taxed under income from other sources in your Income Tax Return. If this pension is commuted or is a lump sum payment it is not taxable.Jul 20, 2018
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Col P S Sundaram , puthucode.sundaram@gmail.com
ReplyDeleteAfter the period of 15 yrs deduction of monthly com mutated amount is stopped.Please clarify if this is added to our basic pension, if so does the DA is calculated on this total amount.