Article 18 | Taxation of Pension


Growing old might have a fair share of pain and pleasure. It is a mix of joy on retirement, commencing second innings, and spending ample time on things you love. Though the person has retired, the tax department will not stop poaching. So here comes the taxation on the retirement income, i.e., the beloved pension.

Article 18 _ Taxation of Pensions

Article 18 of the OECD Model Tax Convention covers the taxation on a pension. Though the Article is not complicated and capricious, it sometimes has a fair share of litigation.

Article 18

Article 18 states that the pension received by the person, relating to his employment in the private sector, are taxable only in the State of Residence. The rationale for bestowing all powers of taxation to the State of residence is that the State of residence is in a better position than any other state to take the pensioner’s overall tax liability and obligations.

In case of pensions received by the person from a state or the political division and the same is not covered by Article 19(2), then it is taxable under Article 18.

But not all members of the OECD agree to this principle, and there exist multiple versions of taxation.

What is covered under pension?

Article 18 covers under the term ‘pension’ all payments received by the person or his beneficiaries directly from his former employee. For qualifying as the ‘pension,’ the amount should be obtained for the past employment service. Annuity income received by the person from his investments will not be a pension under this Article.

The Article covers periodic and non-periodic payments.

On the cessation of employment, an employee will receive various payments. To determine whether they are taxable under Article 18, the nature of the payments and facts and circumstances of the case is of importance. Article 15 covers the taxation of income received on cessation of employment.

Factors assisting identification of payment as a pension:

  1. Whether the payment is made on or after the cessation of employment
  2. Whether the recipient continues working
  3. Whether the recipient has reached the normal age of retirement w.r.t his nature of employment
  4. The status of other recipient who qualify for the same type of payment
  5. Whether the recipient is simultaneously eligible for the other pension benefits

Note: Reimbursement of pension contributions in case of temporary employment, does not form part of Article 18.

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