Commutation of Pension

Commutation of pension is a financial provision offered to pensioners, allowing them to receive a portion of their pension amount as a lump-sum payment. This option is particularly useful for retirees who require immediate funds for personal needs, such as medical expenses, debt repayment, or significant purchases. By opting for commutation, the pensioner sacrifices a part of their monthly pension in exchange for this upfront payment.

The commutation amount is calculated based on factors such as the pensioner's age, the amount to be commuted, and predefined government or institutional tables. Typically, a maximum of one-third of the pension can be commuted. After commutation, the remaining pension is disbursed monthly as a reduced pension. The formula to calculate the interest rate charged in commutation is derived by evaluating the lump sum received, the reduction in monthly pension, and the duration of the commutation (or expected lifetime). Here's the basic approach:

Formula:

Where:

• Lump Sum: The amount received as a commutation.
• Annual Pension Reduction: The yearly reduction in the pension due to commutation.
• Years: The duration over which the commutation applies (e.g., life expectancy or the restoration period).

Example:

Lump Sum (C): ₹10,00,000
Monthly Pension Reduction (P): ₹5,000
Years: 15

Step 1: Calculate the annual pension reduction:
Annual Pension Reduction = P × 12 = ₹5,000 × 12 = ₹60,000

Step 2: Apply the formula: