Income Tax on Pension India AY 2026-27: Commuted, Uncommuted, Family Pension

How is pension taxed in India? Uncommuted pension is taxed as salary at your slab rate after claiming the Rs 75,000 standard deduction. Commuted pension is partially or fully exempt under Section 10(10A) depending on your employer type and whether you received gratuity. Family pension is taxed under "Income from Other Sources" with a deduction of Rs 25,000 or 1/3 of the amount, whichever is lower.

Pension income in India is not taxed as a single category. The Income Tax Act distinguishes between three types: uncommuted pension (periodic payments received monthly or quarterly from an employer), commuted pension (a lump sum received by converting part or all of the future pension into a one-time payout), and family pension (payments received by a dependent family member after the pensioner's death). Each type falls under a different head of income with different exemptions, deductions, and filing requirements.

For AY 2026-27 (FY 2025-26), the standard deduction has been increased to Rs 75,000 for salaried individuals and pensioners. This post covers the exact tax treatment for each pension type, the exemption thresholds under Section 10(10A), NPS and EPF pension rules, and a worked example for a retired government employee.

Three Types of Pension and How They Are Taxed

This classification is the foundation of pension taxation. Uncommuted pension is treated exactly like salary because it replaces the salary you received while in service. Commuted pension gets a partial or full exemption because it is a one-time conversion of accumulated pension rights. Family pension falls under "Other Sources" because the recipient was never the employee.

Uncommuted Pension: Taxed as Salary

Uncommuted pension is the regular monthly or periodic pension paid by a former employer (Central Government, State Government, PSU, or private company) after retirement. Under Section 17(1)(ii) of the Income Tax Act, any annuity or pension is included in the definition of "salary."

Tax Treatment

• Fully taxable at your applicable slab rates under either old or new regime
• Added to your total income for the financial year
• Eligible for standard deduction of Rs 75,000 (increased from Rs 50,000 effective FY 2024-25, further to Rs 75,000 from FY 2025-26)
• TDS deducted by the pension disbursing authority (bank or department) under Section 192

Standard Deduction for Pensioners

The standard deduction of Rs 75,000 applies to all salaried individuals and pensioners under both the old and new tax regimes from FY 2025-26. For pensioners, this is a flat deduction from gross pension income with no documentation or proof of expenditure required.

If you receive pension from multiple employers (for example, a government pension plus a pension from a previous private employer), the standard deduction of Rs 75,000 is available only once against the aggregate pension income.

Commuted Pension: Section 10(10A) Exemption

Commutation of pension means converting future monthly pension payments into a lump-sum payout. Instead of receiving Rs 40,000 per month for the rest of your life, you opt to receive a one-time amount (for example, Rs 15,00,000) in exchange for a reduced or eliminated monthly pension.

The tax exemption on commuted pension under Section 10(10A) depends on two factors: whether you are a government or non-government employee, and whether you have received gratuity.

Step-by-Step Guide

Commuted Pension Exemption Rules Under Section 10(10A)

Three-tier exemption based on employer type and gratuity status

1

Government Employee

100% of commuted pension is exempt from income tax. This includes Central Government, State Government, local authority, and statutory corporation employees. No conditions on gratuity.

Fully Exempt

2

Non-Government Employee WITH Gratuity

If you have received or are entitled to receive gratuity, 1/3 (one-third) of the commuted value of the full pension is exempt. The remaining 2/3 is taxable as salary.

1/3 Exempt

3

Non-Government Employee WITHOUT Gratuity

If you have not received and are not entitled to receive gratuity, 1/2 (one-half) of the commuted value of the full pension is exempt. The remaining 1/2 is taxable as salary.

1/2 Exempt

Source: Section 10(10A), Income Tax Act 1961 (Section 19 under Income Tax Act 2025)

Calculating the Exempt Amount for Non-Government Employees

The calculation uses the "commuted value of the full pension," not just the amount you actually commuted. This distinction matters.

Formula when gratuity was received (1/3 exemption):

Exempt amount = (Commuted pension received / Percentage of pension commuted) x 1/3

Example: A private sector retiree commuted 50% of pension and received Rs 12,00,000. He had also received gratuity.

• Commuted value of full pension = Rs 12,00,000 / 50% = Rs 24,00,000
• Exempt amount = Rs 24,00,000 x 1/3 = Rs 8,00,000
• Taxable amount = Rs 12,00,000 minus Rs 8,00,000 = Rs 4,00,000

Formula when gratuity was NOT received (1/2 exemption):

Exempt amount = (Commuted pension received / Percentage of pension commuted) x 1/2

Using the same numbers but without gratuity:

• Commuted value of full pension = Rs 24,00,000
• Exempt amount = Rs 24,00,000 x 1/2 = Rs 12,00,000
• Taxable amount = Rs 12,00,000 minus Rs 12,00,000 = Nil

Government Employees: Full Exemption

For Central Government, State Government, local authority, and statutory corporation employees, the entire commuted pension amount is exempt regardless of whether gratuity was received. The 1/3 and 1/2 rules do not apply. This is one of the most significant tax advantages of government employment.

Family Pension: Taxed Under "Income from Other Sources"

Family pension is the pension received by a spouse, child, or other dependent family member after the death of the pensioner. It is fundamentally different from the pension the deceased received during their lifetime.

Why Family Pension Is Not "Salary"

Salary, by definition, exists because of an employer-employee relationship. The family member who receives family pension was never employed by the pensioner's employer. Therefore, Section 17(1)(ii) does not apply, and family pension falls under "Income from Other Sources" as per Section 56(2)(ii).

Deduction Under Section 57(iia)

Family pension recipients can claim a deduction under Section 57(iia):

Deduction = Lower of Rs 25,000 or 1/3 of family pension received

This limit was increased from Rs 15,000 to Rs 25,000 with effect from FY 2024-25 (AY 2025-26).

What Family Pension Recipients Cannot Claim

• Standard deduction of Rs 75,000: This applies only to salary and pension (uncommuted) income. Family pension is not salary, so the standard deduction does not apply.
• Section 80TTB (Rs 50,000 interest deduction for senior citizens): This is a separate deduction and is available if the family pension recipient is a senior citizen with interest income, but it does not apply to the family pension itself.

Standard Deduction: Rs 75,000 for FY 2025-26

Comparison

Standard Deduction Eligibility: Pensioner vs Family Pension Recipient

FY 2025-26 (AY 2026-27)

Parameter	Pensioner (Uncommuted)	Family Pension Recipient
Standard deduction	Rs 75,000	Not eligible
Head of income	Income from Salaries	Income from Other Sources
Specific deduction	Standard deduction only	Rs 25,000 or 1/3 (Sec 57(iia))
Available in new regime	Yes	Yes
TDS section	Section 192	Section 194P / self-assessment

Takeaway: Pensioners get a flat Rs 75,000 deduction. Family pension recipients get the lower of Rs 25,000 or 1/3 of pension.

Source: Section 16(ia), Section 57(iia), Income Tax Act 1961

The standard deduction of Rs 75,000 was introduced for salaried taxpayers and pensioners from FY 2025-26 under both old and new tax regimes. For pensioners, it reduces the gross uncommuted pension by Rs 75,000 before applying slab rates.

If a person receives both uncommuted pension (as a retired employee) and family pension (from a deceased spouse), the standard deduction of Rs 75,000 applies only to the uncommuted pension portion. The family pension portion qualifies only for the Section 57(iia) deduction.

Section 194P: Filing Exemption for Senior Citizens Aged 75+

Section 194P provides a simplified compliance mechanism for senior citizens aged 75 years or above. If you meet all of the following conditions, the bank deducts TDS on your pension and interest income and files the return on your behalf. You are not required to file an ITR.

Conditions for Section 194P Eligibility

1. You are a resident individual aged 75 or above during the financial year
2. Your only income is pension from a former employer and interest from the same bank that disburses your pension
3. You have furnished a declaration to the bank in the prescribed form
4. The bank is a "specified bank" notified by the Central Government

What the Bank Does

• Computes your total income (pension + interest)
• Deducts TDS after considering basic exemption limit, standard deduction, and deduction under Section 80TTB
• Deposits TDS with the government
• Files the required information with the Income Tax Department

If you have income from any other source (rental income, capital gains, income from other banks), Section 194P does not apply, and you must file your own ITR.

Pension from NPS (National Pension System)

The National Pension System has its own tax framework that differs from traditional employer pensions. The tax treatment at the time of withdrawal depends on whether you take a lump sum, buy an annuity, or both.

At Retirement (Age 60)

• 60% of NPS corpus: Can be withdrawn as a tax-free lump sum under Section 10(12A)
• 40% of NPS corpus: Must be used to purchase an annuity from an PFRDA-empanelled insurance company
• If total corpus is Rs 8 lakh or below, 100% can be withdrawn as a lump sum (no mandatory annuity)

Tax on NPS Annuity

The annuity income received from the 40% mandatory annuity purchase is taxable as "Income from Salaries" at your applicable slab rate. This is the same treatment as uncommuted pension. The standard deduction of Rs 75,000 applies.

Employer Contribution Deduction

Under Section 80CCD(2), employer contributions to NPS are deductible up to:

• 14% of salary (basic + DA) for Central Government employees
• 10% of salary for all other employees (state government and private sector)

This deduction is available under both old and new tax regimes. For a detailed guide, see NPS Tax Benefits Under Section 80CCD.

Pension from EPF (Employees' Provident Fund)

EPS Monthly Pension

The Employee Pension Scheme (EPS) provides a monthly pension to employees who have completed 10 years of service and attained age 58. This monthly pension is taxable as "Income from Salaries" and qualifies for the standard deduction of Rs 75,000.

Lump-Sum EPF Withdrawal

Lump-sum withdrawal of the EPF balance (employee + employer share + interest) is exempt from tax under Section 10(12) if the employee has rendered continuous service of 5 years or more. For the full rules on EPF withdrawal taxation and TDS, see EPF Withdrawal Tax Rules.

Pension from Insurance Annuity Plans

Annuity income received from pension plans purchased from LIC, ICICI Prudential, HDFC Life, or other insurance companies is fully taxable at your slab rate. These annuity payments do not qualify for the Section 10(10A) exemption because Section 10(10A) applies only to commuted pension received from an employer, not from an insurance company.

The purchase price of the annuity may have qualified for deduction under Section 80CCC (up to Rs 1.5 lakh within the overall 80C cap) when you paid the premium, but the annuity receipts themselves are fully taxable as income.

Worked Example: Tax Computation for a Retired Government Employee

Mr. Suresh Kumar, aged 65, retired Central Government officer

Step 1: Commuted Pension Exemption

Mr. Kumar is a government employee. Under Section 10(10A), the entire commuted pension of Rs 15,00,000 is exempt.

• Taxable commuted pension: Rs 0

Step 2: Standard Deduction on Uncommuted Pension

• Uncommuted pension: Rs 4,80,000
• Less: Standard deduction: Rs 75,000
• Taxable pension under "Salaries": Rs 4,05,000

Step 3: Total Taxable Income

Step 4: Tax Under New Regime (FY 2025-26)

Mr. Kumar's total taxable income of Rs 4,85,000 is below the Rs 12,00,000 threshold for rebate under Section 87A under the new regime. His effective tax liability is nil despite a gross income of over Rs 20 lakh (due to the Rs 15 lakh commuted pension exemption).

If Mr. Kumar Were a Private Sector Retiree (with Gratuity)

Assuming he commuted 40% of his pension and received Rs 15,00,000:

• Commuted value of full pension = Rs 15,00,000 / 40% = Rs 37,50,000
• Exempt amount (1/3 of full value) = Rs 12,50,000
• Taxable commuted pension = Rs 15,00,000 minus Rs 12,50,000 = Rs 2,50,000
• Total taxable income = Rs 4,05,000 + Rs 2,50,000 + Rs 80,000 = Rs 7,35,000
• Tax under new regime = Rs 0 (still below Rs 12,00,000 for Section 87A rebate)

Which ITR Form to File

Most pensioners with straightforward income (pension plus bank interest) can file ITR-1 (Sahaj), which is the simplest form. Family pension recipients can also use ITR-1 as long as they do not have capital gains, foreign assets, or income exceeding Rs 50 lakh.

Common Mistakes in Pension ITR Filing

1. Reporting family pension under "Salaries." Family pension must be reported under "Income from Other Sources." Reporting it under "Salaries" inflates the standard deduction claim and will be flagged during processing.

2. Claiming standard deduction on family pension. The Rs 75,000 standard deduction applies only to salary and uncommuted pension, not to family pension. Family pension qualifies only for the Section 57(iia) deduction.

3. Not claiming commuted pension exemption. Government retirees sometimes report the full commuted pension as taxable income without claiming the Section 10(10A) exemption. This results in excess tax payment.

4. Confusing pension from NPS annuity with commuted pension. Annuity income from NPS or insurance plans is fully taxable. It does not qualify for Section 10(10A) exemption, which applies only to commutation of pension from an employer.

5. Missing the Section 80TTB deduction. Senior citizens (60+) can claim up to Rs 50,000 deduction on interest income from deposits under Section 80TTB (old regime only). Many pensioners forget this while computing total tax.

Frequently Asked Questions

Is pension income taxable for senior citizens?

Yes. Uncommuted pension is fully taxable as salary for all age groups, including senior citizens. However, senior citizens benefit from higher basic exemption limits (Rs 3,00,000 under old regime for 60-79, Rs 5,00,000 for 80+) and additional deductions like Section 80TTB. Under the new regime, the basic exemption is Rs 4,00,000 for all age groups.

Is commuted pension taxable for government employees?

No. Under Section 10(10A), the entire commuted pension received by a Central Government, State Government, local authority, or statutory corporation employee is fully exempt from income tax. No conditions on gratuity receipt apply.

What is the standard deduction for pensioners in FY 2025-26?

Rs 75,000. This deduction applies to uncommuted (monthly/periodic) pension under both old and new tax regimes. It is deducted from gross pension before computing taxable income. Family pension recipients are not eligible for this standard deduction.

How is family pension taxed differently from regular pension?

Regular pension (uncommuted) is taxed under Income from Salaries with a standard deduction of Rs 75,000. Family pension is taxed under Income from Other Sources with a deduction of Rs 25,000 or 1/3 of the pension, whichever is lower, under Section 57(iia). Family pension does not qualify for the Rs 75,000 standard deduction.

Do pensioners need to file ITR if their income is below the taxable limit?

Generally no, if total income is below the basic exemption limit. For senior citizens aged 75+ with only pension and interest from the same bank, Section 194P allows the bank to deduct TDS and file on their behalf, eliminating the ITR filing requirement entirely.

Is NPS annuity income eligible for Section 10(10A) exemption?

No. Section 10(10A) applies only to commuted pension from an employer. Annuity income from NPS or insurance pension plans is fully taxable at your slab rate. The 60% lump-sum NPS withdrawal at retirement is tax-free under Section 10(12A), but the annuity payments from the remaining 40% are taxable.

Can I receive both pension and family pension?

Yes. A retired government employee receiving their own uncommuted pension may also receive family pension from a deceased spouse who was also a government employee. The own pension is taxed under Salaries (with standard deduction), and the family pension is taxed under Other Sources (with Section 57(iia) deduction). Both must be reported separately in the ITR.

What is the deduction limit on family pension under Section 57(iia)?

The deduction is the lower of Rs 25,000 or 1/3 of the family pension received. This limit was increased from Rs 15,000 to Rs 25,000 with effect from FY 2024-25. For annual family pension of Rs 75,000 or above, the deduction is capped at Rs 25,000.