TLDR Government employees can opt for pension commutation at retirement to receive a lump sum amount in advance by reducing their pension for the next 15 years, but NPS employees do not have this benefit.
Key insights
📊The process of pension commutation involves a formula and treatment to determine the amount of money one will receive, and it is important to compare the pension amount before and after commutation to make an informed decision.
💰Pension commutation allows government employees to receive a lump sum amount in advance by reducing their pension for the next 15 years upon retirement.
🤔The National Pension Scheme (NPS) does not offer the same benefits as the Old Pension Scheme, creating a lack of competition in terms of retirement benefits for NPS employees.
💰Employees have the option to reduce their basic pension by up to 40% and receive a lump sum amount in return.
📉The reduction in pension amount after commutation is calculated based on a formula that takes into account the employee’s basic pension and the percentage of reduction.
💸Employees who choose pension commutation can receive a lump sum amount based on a formula that takes into account their basic pension and the percentage of commutation they opt for.
💰The amount received as pension commutation can vary depending on the calculation method, potentially resulting in a significant difference in the final payout.
📉The reduce function affects the calculation of DR (Dearness Relief) on the original basic pension, but not on the reduced pension amount.
Highlights
👋00:00 Learn about pension commutation for government employees in today’s video.
💰00:14 Pension commutation is the process of selling a portion of one’s pension for a lump sum payment, and the video explains how it is calculated and who is eligible.
💰01:15 Government employees can receive a lump sum amount in advance by reducing their pension for the next 15 years through the pension commutation scheme.
💰02:36 Employees eligible for the Old Pension Scheme can opt for commutation at retirement to receive a lump sum amount, but NPS employees do not have this benefit.
💰03:43 Government employees can reduce their pension by 40% in exchange for a lump sum payment, with the full pension starting after 15 years.
💰05:33 Pension commutation reduces pension amount by a percentage, with the remaining pension calculated based on the reduced amount.
📝07:51 Calculate pension after commutation using the commutation factor based on employee’s age, with the result being 8.14.
📝09:35 Pension commutation reduces the basic pension by around Rs. 11 lakh 80 thousand, with a maximum reduction of 40%, and the Dearness Relief is not calculated on the reduced pension.
How to Calculate Pension Commutation?
To calculate the commutation of pension, you need to multiply the amount of pension to be commuted by 12 and the purchase value for the age of the pensioner at the time of retirement [3].
The formula for determining the total commutation amount is: Total Commutation Amount = Commuted Amount x Commutation Factor x 12 [4].
The commuted value of pension is calculated as Commuted Value of Pension = Commuted Portion x Commutation Factor x 12 [5].
A commutation factor of 40% is commonly used to calculate the commuted portion of the pension [6].
It’s essential to know the rules and regulations regarding commutation, as the maximum portion of pension that can be commuted is typically 40% of the basic pension amount [7].
What is the formula to calculate the commuted value of pension?
The formula to calculate the commuted value of pension is: Commuted Value of Pension = Commuted Portion X Commutation Factor X 12.
How is the commutation age determined for pensioners?
The commutation age for pensioners is determined as the age of the pensioner on their retirement date.