A Retiree’s Dilemma- To Commute or not to Commute the Pension

1. Commutation of Pension is one of the most crucial decisions during PMR/ Superannuation and the
factors to be considered are not only financial but many other intangibles. Though, there can not be
any straight answers to it, here is FINVISION's attempt to simplify the decision matrix on whether ‘To
commute or not to commute the pension’.

Financial Factors
2. For illustration let's use details of an officer proceeding on PMR after 24yrs of service:-
(a) Basic Pension is ₹90450.
(b) Applicable Commutation factor is 8.996.
(c) 50% pension is commuted i.e Commuted Corpus received=₹(90450x8.996x12)/2 = ₹48,82,129.
Note: The pensioner continues to get DA/DR even on the commuted portion.

3. Following assumptions have been taken for calculation:-

(a) DR/ DA as on date is 17%.
(b) Annual increase in DA/DR for next 15 yrs will be 6%.
(c) Officer opts for New Income tax slab and current IT rates have been applied.

4. Based on the above cash flow table:

(a) When Pension is Taxable. The shortfall in the monthly pension for 15 years due to commutation
can be completely fulfilled by investment of the commuted corpus for just 3% annual post tax returns.
(b) When Pension is Tax Free. For breakeven, the Commuted Corpus need to be invested for 7.2%
annual post tax returns.
(c) If cess and other charges as applicable to income tax on monthly full pension received are added to
above calculations. Then the breakeven rate of return will further come down to even below 3%.

5. Other factors influencing Commutation decisions could be:-

(a) Any major liability to be paid off: Commute.
(b) Likely to pick up a job or have a source of regular income from any business etc to fill up the gap
created in regular pension due to commutation: Commute
(c) PMR and officers retiring at younger ages: Should prefer to commute, unless commutation of
pension is ruled out for other more compelling reasons.
(d) The Commuted corpus comes as tax free and in an unfortunate demise of the pensioner. The
pension to the spouse gets restored/ reverted to full pension.
6. Conclusion. Based on the financial factors alone, pensioners should always prefer to commute the
pension as the breakeven rate of return of 3% is possible even with the SBI FD(current SBI FD rates
are 5.1% pre tax and 3.47% post tax).
In addition, the available commuted corpus at hand provides chances of availing opportunity cost.