Pension commutation
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How to calculate pension commutation and profit or loss in commutation?

Defense person gets a lump sum amount at the time of retirement which is very helpful for him to settle down after retirement. At the time of retirement, the defense person gets pension, service gratuity, AFPP fund, pension commutation, Army Group Insurance Fund (AGI), leave encashment and other adjustments. Defense pension commutation is optional at the time of retirement. Defense Persons can commute up to 50% of their pension. In this post we will talk about Defense Pension Commutation.

At the time of retirement, the most important question in front of the defense person is whether he should make 50% commutation of his pension or not. We will tell in detail about whether Defense Person has any benefit in commuting 50% pension or not.

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

Just now we have seen how much money is deducted per month in pension commutation and how much pension the defense person gets after commutation. Now we will talk about how much amount gets together at the time of retirement after doing 50% commutation and whether there is any benefit in commutation or not.

While doing all this calculation, we will take the above mentioned pension as an example.

Defense Pension Commutation Formula
From the above calculation, we have seen that on doing 50% pension commutation, the defense person has to deposit a total of Rs 2047500 in 15 years. Now let's talk about how much money the defense person gets for commutation at the time of retirement.

For this, there is a pension commutation formula, from which we know the amount we will get from commutation. The pension commutation formula is as follows.

50% of pension X 12 X Purchase value on the age next birthday

The purchase value is very important in the pension commutation formula. The purchase value table is given in the photo below. The age of the next birthday is taken at the time of retirement in the purchase value. If you are retiring after turning 35, then the purchase value will be taken at 36 years.

From this commutation formula, we will find the commutation amount received by two defense personnel. A Defense Person who retires at the age of 35 and a Defense Person who retires at the age of 50, only then we will know whether there is benefit in commuting pension or not. Let us put the value in the pension commutation formula.

Commutation amount of the person who retires at the age of 35 =

11375 X 12 X 9.136 (36 Years Purchase Value)

= Rs 1247064

Commutation amount of the person who retires at the age of 50 =

11375 X 12 X 8.808 (Purchase Value of 51 Years)

= Rs 1202292

It is clear from the amount of pension commutation given above that two persons commute for the same pension (Rs 11375) for 15 years but the person who is retiring at the age of 35 is getting Rs 1247064 while at the age of 50 years. The person retiring is getting Rs 1202292.

One thing is clear from this calculation that Defense Persons who retire at a young age have more benefit in pension commutation. Now let's talk about the pension commutation benefit.

Pension commutation benefit

  1. The biggest advantage of pension commutation is that you get a huge amount at once, which you can use in your business, building a house, education of children etc.
  2. The amount received in pension commutation is tax free i.e. you do not get any tax on that amount. Suppose you retire at the age of 35 and do not commute pension and take full pension. ESMs who retire at the age of 35 definitely try for another government job, in this situation, you will definitely come under the tax net by adding your full pension and other salary and you will have to pay tax every year. Therefore, you can also take advantage of tax benefits through pension commutation.
  3. The third advantage of pension commutation is its risk factor. If the ESM who has commuted the pension dies due to any reason then his outstanding commutation amount is forgiven and he need not pay the balance amount.
  4. The government charges 8% interest on the amount received on pension commutation, which is less as compared to personal loans and auto loans. If you have any of these loans, then you can take advantage of the same by repaying the commutation amount.
  5. Defense Persons taking VRS try for second government job after retiring and when they are nearing to retire after finishing second job then their period of 15 years of commutation has also ended and they get full pension. gets started. During the commutation of 15 years, when they get less pension, then their expenses can also be met from other salary.

Disadvantages of Pension Commutation

  1. If your age at the time of retirement is 50 years or more then you have loss in pension commutation as compared to defense person who retires at the age of 35 years. This loss can range from 50000 to 70000 rupees in JCO and other ranks. That is, the jawan taking VRS has more benefit in pension commutation.
  2. After retirement, if you do not have any big expenses or you do not have any investment plan and you want to put this commutation amount in FD (Fixed Deposit) which gives about 6% interest. In this condition also you are at a loss as you get 8% interest in pension commutation.

Eligibility for pension commutation

  1. Defense Person should be eligible for pension at the time of retirement.
  2. There should not be any judicial case against him.
  3. Pension commutation claim must be submitted before retirement or one year after retirement. A medical certificate has to be submitted for claiming pension commutation after one year of retirement.

8% interest is charged in pension commutation and 50% pension is commuted till 15 years. After 15 years ESM starts getting full pension. All the information related to pension commutation has been covered in this post.

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