Curious About Pension Commutation? Discover Why People Choose This Option

Hi to all,

I want to know what the benefits of commutation of pension are and why people opt for it.

Regards,
Monika :icon1:

Hi Monika,

Commutation of pension is selling out a part of the pension at a rate on which the annuity is determined. You get a lump sum in lieu of commutation, which is fully tax-free. The amount of your pension that you can commute depends on the rules of the Pension Fund, but in most cases, one third of the pension is allowable for commutation.

For example, if your pension is Rs 3000/-, you can commute one third, which is Rs 1000/-. You will receive a lump sum, and your monthly pension will be Rs. 2000/-. Organizations that are buying annuities from the Life Insurance Corporation of India for the payment of pensions to their employees cannot reinstate the part of the pension allowable for commutation. However, for government employees, one third of the pension that they commute at the time of retirement gets reinstated after 15 years (perhaps it has been amended to 10 years).

Therefore, from the above, I hope you understand the benefits of commutation and why people opt for it.

You mean they can use this pension amount before retirement. Is it so, or am I taking it the other way round?

Hi Monika,

Pension is payable only on retirement or on resignation if the benefit accrues to the employee at the time of resignation. It is a superannuation benefit, so is commutation. How can you expect a pension before retirement?

So, can we demand pension after resignation? Is it so? Please, somebody clear my confusion.

Hi Sarita,

In all cases, one can't demand a pension scheme after resignation. If one has completed at least 10 years of service and has reached the age of 58, then one can enjoy the benefits of the pension scheme. However, one can also enjoy it after reaching the age of 50, but in such a condition, the pension amount will be reduced by 3% per annum (it may be 4% per annum now, please verify).

Hope this clears your doubt.

Dear Sarita,

Let me clarify everything to you.

1. One gets a pension if one is a member of a pension fund. That means if your employer/organization has a pension scheme (self or outsourced). Many organizations do not have one, and only benefits are gratuity and PF.

2. The pension is regulated by the pension rules. Generally, the minimum service for a pension is 10 years. Further, if you do 33 years of service, you get full pension as per the formula, which will be based on your Pay. If you have 20 years plus service, then some organizations give the benefit of 5 years of notional service. Thus, if you have put in 20 years of service, your pension will be calculated by adding 5 years to your service.

3. Please note that whatever pension is fixed for you (generally basic for this purpose) on your retirement, one-third you can commute. This means if your basic is fixed at 9000/-, you can commute one-third, i.e., 3000/- per month for say 15 years (15 years does not mean you will get exact 15 years, but it is based on some factors depending on your age). Let us say your factor is 13; then your commutation amount will be 3000 x 12 (months) x 13 (factor in your case) = Rs. 468000/-

4. Generally, the 2nd commutation is allowed after 15 years.

5. Please remember your reduced basic every month after commutation will be 6000, and you will get DA on the original basic of 9000/-

Hope now you understand.

Pension is after retirement, commutation is pre-empting some part of your basic pension. These are social security measures.

Thanks.

Prabhaker Verma

Dear Prabhakar,

Thank you for sharing it. Could you please tell me the formula for the pension mentioned above, and where can I find the commutation formula?

Thank you.

Dear all,

I am a Navy retired pensioner. Today, for the first time, I received my pension slip. There is a commutation installment of Rs. 675 per month, and deductions will be made up to December 2018.

I am not aware of this deduction. How can the State Bank of India do this without my knowledge?

If anybody wants to discuss this topic, please revert to me.

Thanks!

My mother is receiving a pension following my father's passing while he was in service. The pension has already commenced, and we were unaware of the option for pension commutation earlier. Is it possible to opt for pension commutation at this time?