How Pension Income Is Taxed in India for AY 2026-27

How is pension taxed in India? Uncommuted pension is taxed as salary at your slab rate after claiming the standard deduction (Rs 75,000 new regime, Rs 50,000 old regime). 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 1/3 of the amount, capped at Rs 25,000 (new regime) or Rs 15,000 (old regime).

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 for salaried individuals and pensioners is Rs 75,000 under the new regime and Rs 50,000 under the old regime. 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 under the new regime (raised from Rs 50,000 from FY 2024-25 by the Finance (No. 2) Act 2024) or Rs 50,000 under the old regime
• TDS deducted by the pension disbursing authority (bank or department) under Section 192

Standard Deduction for Pensioners

The standard deduction under Section 16(ia) is Rs 75,000 under the new regime and Rs 50,000 under the old regime for 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 (Rs 75,000 new regime / Rs 50,000 old regime) 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.

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 1/3 of family pension received or Rs 25,000 (new regime) / Rs 15,000 (old regime)

The Rs 25,000 cap applies only under the new regime (Section 115BAC), raised from Rs 15,000 from FY 2024-25 (AY 2025-26) by the Finance (No. 2) Act 2024. Under the old regime the cap is still Rs 15,000.

What Family Pension Recipients Cannot Claim

• Standard deduction (Rs 75,000 / Rs 50,000): 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 for FY 2025-26: Rs 75,000 (New) or Rs 50,000 (Old)

The standard deduction is Rs 75,000 under the new regime (from FY 2024-25) and Rs 50,000 under the old regime. For pensioners, it reduces the gross uncommuted pension 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 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 specified bank computes your tax on pension and interest income and deducts it as TDS. You are then 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 Form 12BBA
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 allowing the standard deduction, Chapter VI-A deductions (such as 80TTB under the old regime) and the Section 87A rebate
• Deposits TDS with the government

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)

• Tax-free lump sum: Section 10(12A) exempts up to 60% of the total corpus withdrawn at closure
• Government subscribers: up to 60% lump sum, at least 40% must buy an annuity
• Non-government subscribers: under the December 2025 PFRDA exit rules, up to 80% can be taken as a lump sum with at least 20% in an annuity, but only 60% is tax-free and the extra 20% is taxed at slab rates
• If total corpus is Rs 8 lakh or below, 100% can be withdrawn as a lump sum (no mandatory annuity); the tax exemption is still limited to 60%

See NPS withdrawal tax rules for the full exit bands.

Tax on NPS Annuity

The pension received from the annuity bought with your NPS corpus is fully taxable every year at your applicable slab rate. It gets no Section 10(10A) or 10(12A) exemption.

Employer Contribution Deduction

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

• New regime: 14% of salary (basic + DA) for all employees, government and private (from FY 2024-25)
• Old regime: 14% for Central and State Government employees, 10% for other employees

This deduction is available under both old and new tax regimes, but it matters only if the pensioner is still receiving salary with employer NPS contributions. 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 (Rs 75,000 new regime / Rs 50,000 old regime).

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

Income for FY 2025-26: commuted pension Rs 15,00,000, uncommuted pension Rs 4,80,000 (Rs 40,000 a month), FD interest Rs 80,000. He files under the new regime.

Step 3: Total Taxable Income

• Taxable pension: Rs 4,05,000
• FD interest (Income from Other Sources): Rs 80,000 (no Section 80TTB in the new regime)
• Total taxable income: Rs 4,85,000

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

• Rs 0 to Rs 4,00,000: nil
• Rs 4,00,001 to Rs 4,85,000 at 5%: Rs 4,250
• Less Section 87A rebate: Rs 4,250
• Tax payable: nil

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 before rebate = 5% of (Rs 7,35,000 minus Rs 4,00,000) = Rs 16,750, fully covered by the Section 87A rebate, so tax payable is nil

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 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

What standard deduction can a pensioner claim for AY 2026-27?

A pensioner receiving regular (uncommuted) pension from a former employer claims a standard deduction of Rs 75,000 under the new regime or Rs 50,000 under the old regime, only once even if pension comes from two employers. With the new regime rebate, pension income up to Rs 12.75 lakh with no other income is tax-free. Family pension does not get this standard deduction.

How much deduction is allowed on family pension for AY 2026-27?

Family pension is taxed under Income from Other Sources. Under Section 57(iia), the deduction is one-third of the family pension subject to a cap of Rs 25,000 under the new regime and Rs 15,000 under the old regime. So a widow receiving Rs 3 lakh of family pension under the new regime deducts Rs 25,000 and is taxed on Rs 2.75 lakh along with other income.

How is commuted pension of a private sector employee taxed?

For a non-government employee, Section 10(10A) exempts one-third of the full commuted value of pension if gratuity is also received, or one-half if no gratuity is received. For example, if 40% of pension is commuted for Rs 15 lakh, the full value is Rs 37.5 lakh, and with gratuity Rs 12.5 lakh is exempt and Rs 2.5 lakh is taxable as salary. Government employees get full exemption.

Do senior citizens aged 75 and above have to file an income tax return?

Not if they qualify under Section 194P: resident, aged 75 or more, with only pension income and interest from the same specified bank that pays the pension, and a declaration in Form 12BBA given to that bank. The bank then computes tax after deductions and deducts it. Anyone with rent, capital gains or interest from another bank must file an ITR.

Can a retired person claim Section 80TTB on FD interest?

Yes, under the old regime only. A resident senior citizen aged 60 or more can deduct up to Rs 50,000 of interest on bank, co-operative bank and post office deposits, including FDs, under Section 80TTB. It is not available under the new regime, where the rebate for income up to Rs 12 lakh often gives a better result for pensioners with modest income.