The commutation of pension is a game changer for 2024 .

• FastrackGovind
• Armed forces tribunal
• July 4, 2024

What is the commutation of Pension?

Commutation of pension refers to the process where a retired person converts a portion of his periodic future pension disbursements into a lump sum payment.  This facility is aimed to offer immediate financial assistance and help them manage important expenses that may arise post-retirement.

The commutation of pension is one of the most important provisions within the pension system for Central Government employees in India. It enables the retired employees to convert a portion of their future pension into a lump sum. This article will provide an in-depth analysis of the commutation of pension, its benefits, calculations, and legal frameworks, ensuring a comprehensive understanding for potential retirees and their families.

Eligibility Criteria

Eligibility Criteria

The commutation of pension is available to all the Central Government employees eligible for the pension scheme. However, some specific criteria must be met to avail this benefit:

1. Timing of the Request:
2. Within One Year of Retirement- No medical examination is required if the application for commutation is submitted within one year of retirement.
3. After One Year- A medical examination by a designated competent authority is mandatory if the request is made after one year from retirement.

      2. Limit on Commutation: A retired person can commute up to 40% of their total pension.

Calculation of Commuted Value of Pension (CVP)

Commutation is the act of exchanging a portion of a pensioner’s pension for a lump sum amount, and this is determined by a formula and a commutation table. The commutation table that is prescribed by the government is based on the age of the retiree on the next birthday following the date of commutation.

Formula: CVP=40%×Pension×Commutation Factor×12

Where:

• Pension is the monthly pension before commutation.
• The Commutation Factor is determined based on the age of the retiree at their next birthday.

Also Read Rights and Grievances: Legal Protections and Challenges for Armed Forces Personnel in India

Defense Pension Commutation

Defense Persons can commute 50% of their Basic Pension. Service pension is 50% of Basic Pay + MSP + Class Pay + X Group Pay at the time of retirement and Dearness Allowance (Dearness Allowance) at the time of retirement

For example, if the basic pay of a defense person is Rs 40000 and class pay is Rs 300, then the calculation of his service pension will be as follows

40000 + 5200 + 300 ÷ 2

= 45500  ÷ 2 = Rs 22750

Defense personnel also get DA on this pension.

Now let’s talk about the pension commutation formula. DA (Dearness Allowance) is not added to the pension commutation. Assuming that 50% of the defense pension is commuted by the defense person, then the amount to be deducted per month in his commutation is as follows:-

22750 ÷ 2 = Rs 11375

That is, the defense person will have to pay Rs 11375 per month in commutation for 15 years. The amount to be deposited in 15 years is as follows.

11375 X 12 months X 15 years = Rs 20,47500

Defense Person also gets the DA in pension at that time and dearness allowance is available on full pension i.e. he will get dearness allowance at Rs 22750. Assuming DA at the time of retirement is 10%, then dearness allowance on pension will be as follows.

Full Pension X Dearness Allowance ÷100

22750 X 10 ÷ 100 = Rs 2275

The total pension to be received after 50% commutation will be

11375 + 2275 = Rs 13650

Commutation Table

The commutation table shows the commutation factor which is dependent on age. The factor quantifies the year’s purchase of the pension, thus offering a method of converting the lump sum to a standard scale. This table is updated from time to time depending on the current life expectancy and other features of demography.

 

Example Calculation

For example, if a retiree gets a pension of ₹30,000 per month and his/her next birthday will be 60 years, then the commutation factor will be 8. 194 (this factor is illustrative and should be checked in the latest official table).

CVP=40%×30,000×8.194×12

CVP=0.4×30,000×8.194×12

CVP=₹11,80,176

The retiree will receive ₹11,80,176 as a lump sum, and their monthly pension will be reduced by 40%.

Restoration of Commuted Pension

The other important aspect of pension commutation is the restoration of the commuted amount. The pension is restored to the original amount 15 years after the date on which the commuted value is received. This helps to ensure that, although retirees receive a large lump sum, their long-term financial security is not compromised.

Impact on Dearness Relief

Dearness Relief (DR), which is granted to neutralize the effect of inflation, is still computed on the notional amount of pension payable before commutation. This implies that the pensioner enjoys inflation on his/her full pension, though a part has been commuted.

Benefits of Commutation

Advantages of Pension Commutation:

1. Lump Sum Amount:
   • You receive a significant amount of money at once.
   • Can be used for starting a business, building a house, or funding children’s education.
2. Tax Benefits:
   • The amount received from pension commutation is tax-free.
   • Avoids the tax implications of receiving a full pension and another salary if re-employed.
3. Risk Factor:
   • If the Ex-Serviceman (ESM) who has commuted the pension dies, the outstanding commutation amount is forgiven.
   • There is no need to repay the balance amount.
4. Lower Interest Rates:
   • Government charges 8% interest on the commutation amount.
   • This rate is lower compared to personal and auto loans.
   • The commutation amount can be used to repay these higher-interest loans.
5. Second Government Job:
   • ESMs who take Voluntary Retirement Scheme (VRS) often seek a second government job.
   • During the 15-year commutation period, their expenses can be managed with the salary from the new job.
   • After 15 years, the commutation period ends, and they start receiving their full pension again.

Legal Framework

The commutation of pension is governed by the Central Civil Services (Commutation of Pension) Rules, 1981. These rules lay down the detailed procedures and conditions for commutation, including:

• Application process.
• Medical examination requirements.
• Calculation methods.
• Restoration of commuted pension.

The rules are periodically updated to reflect changes in government policies and demographic trends.

If the application is made after one year from retirement, the retiree must undergo a medical examination to ensure they are fit to receive the commuted pension. This examination is conducted by a competent medical authority specified by the government.

Conclusion

The commutation of pension is one of the useful options for retirees of the Central Government in India which offers the immediate full cash amount and pension at the same time, yet the pension amount is secure for the rest of life. The Central Civil Services (Commutation of Pension) Rules, 1981 are quite clear and well structured to ensure that this provision is properly implemented fairly and efficiently.

When properly managed, commuting of pension is one of the best ways of improving the welfare of the retirees in the transition from active service to retirement.