Income from Pension

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Scope of Pension Income

The following types of pensions are relevant for taxation:

Uncommuted Pension - Periodical pension received by the employee.

Commuted Pension - Lump sum payment received in lieu of surrender of a portion of pension.

Family Pension - Pension received by family members after the death of the employee

Tax Treatment of Pension

(a) Uncommuted Pension

When pension is paid at regular periodic intervals, it is known as "uncommuted pension". In the case of a monthly pension, the amount received by a pensioner is taxable in his hands under the head "Salaries" and is treated in the same manner as salary income received from an employer.

 • Exemption in case of disabled personnel of armed forces 

A special exemption is available in the case of disabled personnel of the armed forces. The entire disability pension, comprising both the service element and the disability element, is fully exempt from income-tax, provided the individual has been invalided out of service on account of a bodily disability attributable to or aggravated by military service.

This exemption is not available to personnel who have retired on superannuation or otherwise. Since such disability pension is exempt from tax, the amount so received is not required to be included in salary income for the purpose of deduction of tax at source.

(b) Commuted Pension

Commutation of pension refers to the option given to a pensioner to receive a lump-sum amount by surrendering a portion of his monthly pension.

Government employees are permitted to commute up to 40% of their pension, whereas defence personnel may commute up to 50% of their pension.

The lump-sum amount receivable on commutation depends primarily on the commutation factor and is calculated as:

Age factor × Commutation percentage × 12 × Basic Pay, where Basic Pay means the higher of the last drawn pay or the average pay of the last 10 months preceding retirement.

Although the commuted value of pension is in the nature of income, it is exempt from tax up to the limits prescribed under section 10(10A) of the Income-tax Act.

(a) Exemption to Govt. employees

Commuted pension received by the employees of the Central Government, State Governments, local authorities, corporation established by a Central, State or Provincial Act and members of the defence services are totally exempt from tax.

(b) Exemption to other employees

In case of a non-government employee, the taxability of commuted value of pension depends on the fact whether employee also receives gratuity at the time of retirement.

If he receives gratuity, 1/3rd of full value of commuted pension is exempt from tax, otherwise 50% of commuted pension is exempt from tax. The remaining amount is charged to tax as salary in the year in which it is received.

(c) Family pension

Family pension received by the family members after the death of an employee is taxable in the hands of the recipient under the head "Income from Other Sources".

However, a deduction is allowed from such family pension, being the lower of one-third of the pension or Rs. 15,000. Where the income of the family member is computed under the new tax regime under section 115BAC, this monetary limit of Rs. 15,000 is increased to Rs. 25,000.

Exemption in case of family pension to legal heirs of defense personnel

An exemption is available in respect of family pension received by the widow, children, or nominated heirs of a member of the armed forces, including paramilitary forces of the Union, where the death of such a member occurred in the course of operational duties. In such cases, the family pension so received is not chargeable to tax.

Pension from National Pension System (NPS) or Annuity

The National Pension System (NPS) is a voluntary retirement savings scheme for individuals who are not otherwise entitled to a statutory pension. It encourages systematic savings throughout a person's working life to ensure a steady income in retirement.

To extend its benefits to minors, the Government has introduced the NPS Vatsalya Scheme, under which a parent or guardian can open and contribute to an NPS account on behalf of a minor. Upon attaining majority, the subscriber may either exit the scheme or continue with the account as a regular NPS Tier-I subscriber.

Pension received out of NPS, or annuity, is fully taxable in the hands of the recipient.

Deductions from Pension Income

Standard Deduction

Standard deduction is available to a pensioner whose pension is taxable under the head "Salaries". The deduction is allowed automatically without any supporting evidence. The amount of standard deduction is Rs. 50,000.

Note: A higher standard deduction of Rs. 75,000 shall be available if tax is computed under section 115BAC(1A), i.e., new tax regime.

Relief under section 89

Relief under section 89 can be claimed in respect of commuted value of pension or arrears of pension received in lump sum, subject to furnishing of Form No. 10E.