Income Tax on Pension: Is Pension Taxable?

Income tax* on pension is an important concept for retirees and pensioners. Pension received after retirement is generally taxed under the head “Income from Salaries". Pension payments are usually made monthly as a regular income. In some cases, a person may choose to receive a part of the pension as a lump sum amount, known as a commuted pension. The Income Tax Act, 1961, allows exemptions on certain portions of commuted pension under Section 10. Understanding pension tax rules helps retirees plan their finances and comply with tax regulations. This article explains what is income tax on pension and how they are taxable.

Income tax on pension

Income tax* on a pension applies because pension payments are considered a form of salary income after retirement. Individuals often contribute to pension funds during their working years. Some employers also create pension schemes where both employees and employer contribute regularly. Insurance providers and retirement schemes also offer pension products for salaried and self-employed individuals.
 

Once an individual reaches retirement age, pension funds begin paying a periodic income called an annuity. Many taxpayers ask whether the income tax* on pension is taxable under the existing rules. In most situations, pension payments remain taxable, although certain exemptions apply depending on the pension type. Pensioners can estimate their liability using an income tax calculator.

What is commuted pension and uncommuted pension?

Let’s understand what a commuted and an uncommuted pension are.
 

• Commuted pension (Lump sum payment)
  'Commuted pension' refers to the portion of pension received as a single lump-sum amount at retirement. Individuals may withdraw this amount immediately to meet large expenses such as housing repairs, medical costs, or personal obligations.
  

• Uncommuted pension (Periodic pension income)
  ‘Uncommuted pension’ refers to pension payments received in regular instalments over time. These payments act as a recurring retirement income that supports daily living expenses after retirement.

How does commuted and uncommuted pension work?

Commuted and uncommuted pensions represent two different payout methods under a retirement plan. For example, suppose a retirement fund accumulates ₹1.2 crore at retirement. The individual may withdraw ₹25 lakh as a lump-sum commuted pension. The remaining ₹95 lakh continues generating monthly pension payments over the individual’s lifetime as an uncommuted pension.

How is the tax on pension calculated for both of these types?

Here is how the tax* on a commuted and uncommuted pension is calculated:
 

Commuted Pension (Lump Sum Tax Rules)

• Government or statutory body employees: Commuted pension received by employees of government organisations or statutory corporations remains fully exempt under Section 10(10A) of the Income Tax Act.

• Employees receiving gratuity with pension: Employees who receive gratuity along with a pension can claim an exemption on one-third of the total commuted pension value. The remaining portion may become taxable.

• Employees without gratuity benefits: Employees who do not receive gratuity may claim exemption on one-half of the commuted pension amount under Section 10(10A).
   

Uncommuted Pension (Monthly Pension Income)

An uncommuted pension is fully taxable for individuals across sectors. These periodic payments are treated as salary income during the financial year and taxed according to applicable income tax* slabs.

How to report pension income in ITR?

Pension income must be disclosed correctly while filing the income tax* return.
 

• Select “Pensioners” under the “Nature of Employment” field in the General Information section while filing ITR-1.

• Pensioners may fall under categories such as Central Government, State Government, Public Sector Undertaking, or other pensioners.

• Pension income taxable as salary should include the employer name, address, and Tax Deduction Account Number (TAN).

• Any exempt portion of a commuted pension must be entered under Section 10(10A) Commuted Value of Pension Received.

• Remaining pension income should be reported as annuity pension under Salary Income Section 17(1) of the Income Tax Act, 1961.

Pension received by a family member

A family pension is when pension payments continue to a surviving family member after the pensioner’s death. Such a pension is taxed under the head 'Income from Other Sources' rather than salary income.
 

If a family member receives pension payments regularly, a limited deduction is allowed while calculating taxable income. The deduction equals ₹25,000 or one-third of the uncommuted pension received, whichever amount is lower for the relevant financial year.
 

For instance, suppose a family member receives ₹90,000 as annual pension income. One-third of this amount equals ₹30,000. Since the deduction limit is ₹25,000, only ₹25,000 qualifies for exemption. The remaining ₹65,000 becomes taxable income.

Pension: exempted from tax

Certain pensions remain exempt from taxation under specific circumstances. Pensions received by employees of the United Nations Organisation generally qualify for tax* exemption. Family members of armed forces personnel receiving a pension may also receive a tax exemption under the relevant provisions.
 

Tax* treatment depends on employment category and statutory rules governing pension payments. Pensioners should verify exemption eligibility based on the source and nature of pension income.

Taxability of family pension

'Family pension' refers to the pension received by a spouse or dependent family member after the pensioner’s death. Although pension tax* applies to family pensions, the Income Tax Act permits limited deductions. The deduction equals one-third of the pension amount or ₹25,000, whichever amount is lower under Section 57(iia) of the Income Tax Act, 1961. The remaining portion of the family pension becomes taxable under income from other sources.

What is Section 194P?

Section 194P of the Income Tax Act came into effect on April 1, 2021. This provision provides relief from filing income tax* returns for certain senior citizens.
 

The following conditions must be satisfied:
 

• The senior citizen must be 75 years or older during the relevant financial year.

• The individual must qualify as a resident Indian for that year.

• Income must include only pension income and interest income.

• Interest income must arise from the same bank that pays the pension.

• The individual must submit a declaration confirming eligibility under Section 194P.

• The pension-paying bank must be notified as a specified bank by the central government.

When these conditions apply, the bank calculates tax* liability and deducts the required tax before paying pension income.

Income tax slab under old tax regime for senior citizens

The following table covers the income tax* slab under the old tax regime for senior citizens
 

The exemption threshold differs for senior citizens. Individuals aged between 60 and 80 years receive an exemption of up to ₹3 lakh. Individuals above 80 years receive an exemption up to ₹5 lakh under the old tax* regime.

Income tax slab under new tax regime for individuals

The following table covers the income tax* slab under the new tax regime for individuals
 

Under the new tax* regime, tax slabs remain identical for individuals regardless of age. Pension income falls within these slabs when calculating overall taxable income for the financial year.