Income Tax on Pension: Are Pensions Taxable in India?
- Asharam Swain
- Jun 13
- 14 min read
Income tax is a levy imposed by the government on the incomes of individuals and organizations. The type and source of income, the taxpayer's age and residency status, and other factors all affect the income tax rates and regulations. Pensioners are individuals who, after retirement, continue to receive regular benefits from an employer or fund; however, their pension income is subject to income tax. The Income Tax Act of 1961 provides seniors with additional perks and deductions that help lower their overall tax burden. If you are a pensioner, it is important to understand the specifics of income tax return filing for pensioners, which includes various exemptions and deductions available under the law. Let us explore the concept of tax on pension in detail.
Table of Contents
Income Tax on Pension: Commuted and Uncommuted Pension
The terms commuted and uncommuted pension describe different ways in which pensioners receive their pension payments.
Commuted Pension: This is a lump sum payment of a portion of the pension that a pensioner receives upfront, in exchange for part of their future monthly pension installments. The pensioner then continues to receive the remaining pension in monthly installments.
Uncommuted Pension: In contrast, this refers to the portion of the pension that is paid regularly, without any upfront lump sum payment. The pensioner continues to receive a fixed sum, typically on a monthly basis, for the duration of their life.
Example:
Consider Mr. Prakash, aged 62, who receives a monthly pension of ₹18,000. He decides to commute 12% of his pension for the next 20 years in advance. This results in a lump sum payment of ₹4,32,000 (12% of ₹18,000 x 12 months x 20 years). Mr. Prakash will then receive ₹15,840 per month as his uncommuted pension for the next 20 years. After 20 years, his full pension of ₹18,000 per month will be restored.
How is Commuted and Uncommuted Pension Taxed?
The tax treatment for commuted and uncommuted pensions is governed by the Income Tax Act of 1961 and is an important aspect for pensioners to understand for proper income tax return filing. Here's how these two types of pensions are taxed under the Indian tax laws:
Uncommuted Pension
An uncommuted pension refers to the regular, ongoing payments that the pensioner receives without opting for any lump sum payment upfront. This pension is paid periodically (usually monthly or quarterly) for the lifetime of the pensioner.
Taxability:
Uncommuted pension is fully taxable as salary income under Section 17(1) of the Income Tax Act. This means that the entire amount of pension received by the pensioner, whether it’s monthly or quarterly, is treated as income under the head "Income from Salary" and is taxed as such.
Example:
Let’s assume Mr. Prakash, who has retired at the age of 62, receives a monthly uncommuted pension of ₹15,000. Since this is regular income, Mr. Prakash’s ₹15,000 monthly pension is fully taxable under “Income from Salary” and will be subject to the applicable tax rates based on his total income. If his total income crosses a certain threshold, he will be required to pay taxes accordingly as per the income tax slabs.
For example, if Mr. Prakash’s total income for the financial year exceeds ₹5 lakhs, he would fall under the 20% tax slab (for income between ₹5 lakhs and ₹10 lakhs) and will pay tax accordingly. If his total income exceeds ₹10 lakhs, he will fall under the 30% tax slab.
This section of the pension is not eligible for any exemptions under the tax code unless the pensioner is eligible for specific deductions such as those under Section 80C or Section 80TTB for senior citizens.
Commuted Pension
A commuted pension is when a portion of the pension is paid as a lump sum upfront instead of being distributed in regular installments. Commuted pensions are typically a percentage of the pension amount, calculated based on the age of the pensioner and their length of service.
Taxability:
The taxability of commuted pension depends on whether the pensioner is a government employee or a non-government employee. The tax treatment varies significantly between these two categories.
For Government Employees
Exemption:
The entire commuted pension received by government employees is completely exempt from tax. This exemption applies regardless of whether the pension is commuted as a lump sum or in installments.
Example:
If Mr. Gupta is a retired government employee and decides to commute ₹5,00,000 of his pension, the entire ₹5,00,000 he receives as commuted pension will be tax-free. The rest of the pension he receives on a monthly basis is taxed under the head “Income from Salary”.
For Non-Government Employees
Tax Treatment Based on Gratuity:
The taxability of the commuted pension for non-government employees depends on whether the employee also receives gratuity as part of their retirement package. If a pensioner receives both pension and gratuity, the tax treatment differs from someone who only receives pension without gratuity.
1/3rd Exemption for Pensioners Receiving Both Gratuity and Pension:
If a non-government pensioner receives both a pension and gratuity, 1/3rd of the commuted pension is exempt from tax, and the remaining 2/3rds will be taxable.
Example:
Suppose Mr. Singh, a non-government employee, receives a commuted pension of ₹6,00,000, and also receives gratuity. In this case, 1/3rd of ₹6,00,000 (which is ₹2,00,000) will be exempt from tax. The remaining ₹4,00,000 will be taxable as salary income under the head “Income from Salary”.
½ Exemption for Pensioners Receiving Only Pension (Without Gratuity):
If a non-government pensioner receives only pension and no gratuity, then ½ of the commuted pension is exempt from tax, and the remaining ½ is taxable.
Example:
If Mr. Joshi receives ₹6,00,000 as a commuted pension and does not receive gratuity, then ½ of ₹6,00,000 (which is ₹3,00,000) will be exempt from tax. The remaining ₹3,00,000 will be taxable under the head “Income from Salary”.
Example for Non-Government Employees
Let’s consider an example to better understand the tax treatment for a non-government employee:
Mr. Prakash has retired from a private organization, and his monthly pension is ₹20,000. He commutes 50% of his pension (₹12,000 per month), and he also receives gratuity.
Commuted Pension:
50% of his pension (₹12,000 x 12 x 20 years) = ₹2,88,000 commuted pension lump sum.
Tax Calculation:
Since Mr. Prakash receives both pension and gratuity, the 1/3rd exemption rule applies. So, the exempt amount will be:1/3 of ₹2,88,000 = ₹96,000Therefore, ₹96,000 will be exempt from tax, and the remaining ₹1,92,000 will be taxable.
Commuted Pension Exemption Formula
The commuted pension exemption can be calculated based on whether the pensioner is receiving gratuity along with the pension.
Covered Under the Payment of Gratuity Act
If the pensioner is covered by the Payment of Gratuity Act and receives gratuity, the exemption formula under Section 10(10A) is: ⅓ x (Commuted amount received/commutation %) x 100
Not Covered Under the Payment of Gratuity Act
If the pensioner is not covered under the Payment of Gratuity Act, the exemption formula is: ½ x (Commuted amount received/commutation %) x 100
Tax Slabs for Pensioners for FY 2024-2025 (AY 2025-2026)
Tax Slabs for Pensioners under the Old Tax Regime
The old tax regime provides specific tax slabs for senior citizens and super senior citizens, offering higher exemptions for individuals aged 60 years and above.
Income Range | Senior Citizens (60-80 years) | Super Senior Citizens (80 years and above) |
Up to ₹3 Lakhs | Nil | Nil |
₹3 Lakhs - ₹5 Lakhs | 5% | Nil |
₹5 Lakhs - ₹10 Lakhs | 20% | 20% |
Above ₹10 Lakhs | 30% | 30% |
Example:If Mr. Prakash (aged 62) receives a pension of ₹7,00,000 annually, the tax calculation under the old regime would be:
₹3 Lakhs - ₹5 Lakhs: Taxed at 5% → ₹10,000
₹5 Lakhs - ₹7 Lakhs: Taxed at 20% → ₹40,000
Total Tax: ₹50,000
Tax Slabs under the New Tax Regime for Pensioners
The new tax regime was introduced to provide simplified tax filing options with reduced exemptions. Under this regime, the tax slabs are uniform for all individuals, irrespective of age.
Income Range | Tax Rate |
Up to ₹3 Lakhs | Nil |
₹3 Lakhs - ₹7 Lakhs | 5% |
₹7 Lakhs - ₹10 Lakhs | 10% |
₹10 Lakhs - ₹12 Lakhs | 15% |
₹12 Lakhs - ₹15 Lakhs | 20% |
Above ₹15 Lakhs | 30% |
Example:If Mr. Sharma, aged 65, opts for the new tax regime and receives ₹8,00,000 annually as pension:
₹3 Lakhs - ₹7 Lakhs: Taxed at 5% → ₹20,000
₹7 Lakhs - ₹8 Lakhs: Taxed at 10% → ₹10,000
Total Tax: ₹30,000
The new regime simplifies the filing process by removing most exemptions and deductions, but pensioners have to choose between the old and new tax regimes based on their individual circumstances.
Choosing Between Old and New Tax Regimes
Pensioners must evaluate whether they are better off under the old tax regime with exemptions, deductions, and reliefs (such as Section 80C, 80D, etc.), or under the new regime, which offers lower tax rates but no exemptions. Pensioners should consider their specific financial situation, including any deductions they are eligible for, before making this choice.
TDS on Pension and Its Implications
Under Section 192 of the Income Tax Act, TDS (Tax Deducted at Source) is applicable on all pension payments that are categorized as salary income.
TDS on Family Pension
Family pensions, received after the pensioner’s death, are taxed under the head “Income from Other Sources”. However, family pensions are not subject to TDS since they are considered as income from a different source, and the tax is not deducted at the source.
TDS Responsibility
The responsibility of deducting TDS lies with the pension provider, which could be a government department, nationalized bank, or private employer. These entities must ensure the correct deduction of TDS based on the pensioner's total income and the applicable tax slabs.
For example, if Mr. Prakash receives ₹15,000 as monthly pension from a government body, the government is responsible for deducting TDS at the applicable rate based on his total taxable income.
Tax on Pension Received by a Family Member
When a family member of a deceased pensioner receives the pension, it is treated as “Income from Other Sources” in the family member’s income tax return. In some cases, this income may be exempt.
Exemption: The exemption on family pension is calculated as the lower of ₹25,000 or 1/3rd of the uncommuted pension received by the family member.
Example:If a family member receives ₹1,20,000 as family pension, the exemption will be ₹25,000 (since it is less than 1/3rd of ₹1,20,000, which is ₹40,000). Therefore, the taxable family pension will be ₹95,000 (₹1,20,000 – ₹25,000).
Family pensions that are commuted or paid as a lump sum are generally not taxable, depending on the circumstances. These pensions, if received by a family member, are treated differently from regular family pensions.
Steps to Report Pension Income in Income Tax Returns (ITR)
Accurate income tax return filing for pensioners is essential for tax compliance. Here are the steps pensioners should follow to report their pension income correctly:
Step 1: Obtain Form 16 or Pension Statement
The pensioner should obtain Form 16 (if applicable) or a Pension Statement from their pension provider or employer. This form includes details of the pension amount, TDS deductions, and other relevant information.
Step 2: Identify the Type of Pension
Pensioners must identify whether their pension is commuted or uncommuted. This classification determines how the income will be reported and taxed.
Step 3: Report the Pension Income
Government Pension: Report it under “Income from Salary”.
Non-Government Pension: Report it under “Income from Other Sources”.
Step 4: Enter Employer/Pension Provider Details
The pensioner must provide the details of their employer or pension provider, including name, address, and Tax Deduction Account Number (TAN).
Step 5: Report the Exempted Portion of the Commuted Pension
If the pensioner has received a commuted pension, the exempt portion should be reported under Section 10(10A) of the Income Tax Act.
Step 6: Claim Deductions if Applicable
Pensioners can claim deductions under Section 80TTB (for senior citizens) or other applicable sections depending on their situation.
Step 7: Validate and Submit the ITR
After verifying all the information, validate the entries and submit the ITR through the e-filing portal.
Available Deductions on Pension Income
Pensioners can avail of several deductions and exemptions to reduce their taxable income:
Section 80TTB: Provides ₹50,000 deduction on interest income for senior citizens aged 60 and above. This is in addition to the standard deductions.
Section 88: Allows deductions on premiums for life insurance, PPF, and other retirement savings up to ₹10,000 annually.
Section 89(1): Provides tax relief for arrears of pension received in a lump sum. Pensioners must file Form 10E to claim this relief.
Other Exemptions:
UNO Employees: Pensions received by employees of the United Nations or their families are tax-free.
Supreme Court & High Court Judges: These pensions are partially exempt from tax.
Recent Changes in Taxation for Pensioners for FY 2024-2025
There have been significant updates to pension taxation for FY 2024-2025, offering more relief for pensioners:
Income Tax Slab Revisions: The exemption limit for senior citizens (aged 60-80 years) has been revised to ₹3 lakhs, while for super senior citizens (aged 80 and above), the exemption limit has increased to ₹5 lakhs.
Section 194P: This section provides relief for senior citizens aged 75 and above. As per this provision, such pensioners are exempt from filing income tax returns if they meet specific conditions, including having pension and interest income from the same specified bank.
Illustration of Tax Calculation on Pension Income
Let’s consider Mr. Arvind, who retires on 1st January 2025 with a monthly pension of ₹25,000 and decides to commute 40% of his pension. Here’s how tax is calculated for him:
Case 1: Mr. Arvind is covered under the Payment of Gratuity Act
Commuted Pension: ₹6,00,000
Exemption under Section 10(10A): (⅓ × ₹6,00,000 / 40%) × 100 = ₹4,50,000
Taxable Pension: ₹1,50,000
Case 2: Mr. Arvind is not covered under the Payment of Gratuity Act
Commuted Pension: ₹6,00,000
Exemption under Section 10(10A): (½ × ₹6,00,000 / 40%) × 100 = ₹7,50,000
Taxable Pension: Nil
Conclusion
Pension income is a significant source of post-retirement income, and understanding how it is taxed is crucial for effective financial planning. Pensioners must be aware of the tax exemptions and deductions available to them under the Income Tax Act, particularly regarding commuted and uncommuted pensions. For non-government employees, exemptions vary based on whether they also receive gratuity. Additionally, with changes like Section 194P for senior citizens aged 75 and above, the income tax return filing for pensioners has become simpler.
By understanding the taxability and leveraging available exemptions, pensioners can ensure that they optimize their tax liabilities and enjoy a smooth, worry-free retirement.
FAQs
1. Is pension income fully taxable?
Yes, pension income is fully taxable under the Income Tax Act. It is considered salary income and taxed accordingly. However, pensioners can avail certain exemptions based on whether their pension is commuted or uncommuted.
Uncommuted pension is fully taxable as salary income under Section 17(1) of the Income Tax Act.
Commuted pension may be partially exempt depending on the employment type (government or non-government) and whether the pensioner receives gratuity.
For government employees, the commuted pension is completely exempt from tax. Non-government employees are eligible for exemptions under Section 10(10A).
2. How do I report pension income in my income tax return (ITR)?
To report pension income in your income tax return:
Obtain Form 16 or Pension Statement from your employer or pension provider.
Identify whether your pension is commuted or uncommuted.
For a government pension, report it under “Income from Salary.”
For non-government pensions, report it under “Income from Other Sources.”
If applicable, report the commuted pension exemption under Section 10(10A).
Enter the TAN (Tax Deduction Account Number) of your employer or pension provider.
Validate the details and submit your ITR through the e-filing portal.
3. What is the tax exemption available for commuted pension?
The exemption on commuted pension depends on whether the pensioner is a government employee or a non-government employee:
Government Employees: The entire commuted pension is exempt from tax.
Non-Government Employees:
If both pension and gratuity are received, then 1/3rd of the commuted pension is exempt from tax.
If only pension is received (without gratuity), then ½ of the commuted pension is exempt from tax.
This exemption is available under Section 10(10A) of the Income Tax Act.
4. What is the exemption available for pensions received by family members?
When family members receive pension after the death of the pensioner, the family pension is taxed under “Income from Other Sources.” However, an exemption applies:
The exemption is the lower of ₹25,000 or 1/3rd of the uncommuted pension received.
Example: If a family member receives ₹1,00,000 as family pension, the exemption will be ₹25,000 (since it is lower than 1/3rd of ₹1,00,000, which is ₹33,333). Therefore, the taxable family pension will be ₹75,000 (₹1,00,000 – ₹25,000).
5. Can senior citizens claim any deductions on pension income?
Yes, senior citizens can avail the following deductions on pension income:
Section 80TTB: Senior citizens (aged 60 and above) can claim a deduction of up to ₹50,000 on interest income.
Section 88: Allows deductions on premiums for life insurance, PPF, and other retirement savings up to ₹10,000 annually.
Section 89(1): Provides tax relief for pension arrears received in a lump sum. Form 10E must be submitted to claim relief.
6. What is Section 194P, and how does it benefit senior citizens?
Section 194P provides an exemption for senior citizens aged 75 years and above from filing income tax returns. The benefits are available if the following conditions are met:
The pensioner must be aged 75 years or older.
The pension and interest income must come from the same specified bank.
The pensioner must submit a declaration to the specified bank.
The specified bank is responsible for deducting TDS after considering applicable deductions and rebates under Section 87A.
This provision simplifies the filing process for senior citizens, as they are exempt from filing ITR, provided their pension and interest income are processed by the specified bank.
7. How is TDS deducted on pension payments?
TDS is applicable to all pension payments categorized as salary income under Section 192. The pension provider (whether a government body, nationalized bank, or employer) is responsible for deducting TDS before making the pension payment.
Family Pension: Family pensions are not subject to TDS as they are categorized as “Income from Other Sources.”
TDS Responsibility: Pension providers, including government departments and nationalized banks, must deduct TDS on pension income based on the applicable income tax slabs.
8. Are there any exemptions for pensions received by armed forces personnel or their families?
Yes, pensions received by armed forces personnel or their families are exempt from tax under the Income Tax Act:
Pensions for Armed Forces Personnel: Exempt under Section 10(19).
Pensions for Widows, Children, or Heirs of Armed Forces Personnel: Exempt from tax, ensuring that the families of deceased veterans do not face tax burdens on their pension.
9. How do I claim exemptions on commuted pension for non-government employees?
The exemption on commuted pension for non-government employees is calculated based on whether the pensioner receives gratuity along with the pension:
With Gratuity: 1/3rd of the commuted pension is exempt from tax.
Without Gratuity: ½ of the commuted pension is exempt from tax.
The exemption is calculated under Section 10(10A) of the Income Tax Act.
10. Can pensioners avail of any special exemptions based on their profession or service?
Yes, certain categories of pensioners are entitled to special exemptions:
UNO Employees: Pensions received by employees or their families from the United Nations are tax-free.
Supreme Court and High Court Judges: Pensions received by judges are partially exempt from tax.
Gallantry Awardees: Pensions awarded to recipients of gallantry medals (e.g., Maha Vir Chakra, Param Vir Chakra) are tax-exempt under Section 10-18-I.
These exemptions apply to specific professions or honors and ensure tax relief for these groups.
11. What should I do if I cannot find my pension statement or Form 16?
If you are unable to find your pension statement or Form 16, you should:
Contact your pension provider (government department, employer, or nationalized bank) to request a copy of the pension statement.
For government pensioners, the Pension Payment Office (PPO) should be contacted.
For private pensioners, check with your employer’s HR department or the bank processing your pension.
If you still cannot obtain the document, consider filing your ITR under the “Income from Other Sources” section with the available details.
It is essential to ensure that you report all income accurately to avoid penalties.
12. Are there any changes to income tax slabs for senior citizens in FY 2024-2025?
Yes, there have been important changes to the income tax slabs for senior citizens in FY 2024-2025:
For individuals aged 60-80 years, the income tax exemption limit has been increased to ₹3 lakhs.
For super senior citizens aged 80 years and above, the exemption limit has been raised to ₹5 lakhs.
These changes aim to provide relief to senior citizens and ensure they have a higher threshold before becoming liable to pay taxes.
