Commutation of Pension

Tax Glossary Definition

Commutation of Pension

Commutation of pension means receiving a lump-sum payment in exchange for a portion of one’s future periodic pension. This allows retirees to access immediate funds while continuing to receive a reduced monthly pension thereafter. The taxability of commuted pension depends on the type of employment and applicable provisions of the Income Tax Act.

Example: Government employees enjoy full exemption on the commuted portion of their pension, whereas non-government employees receive partial exemption subject to specified limits.

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