Pension Income Taxation Rules and Exemptions in India
- Nimisha Panda
- Dec 2, 2025
- 8 min read
Updated: Dec 7, 2025
Pension income in India is taxable under the Income Tax Act, 1961, but several exemptions and deductions ensure financial relief for retirees. The tax treatment differs depending on whether the pension is commuted (received as a lump sum) or uncommuted (received monthly), and whether the individual is a government or non-government employee. The 2025 Union Budget refined these rules further, increasing the standard deduction and simplifying the structure for pensioners. With clear guidelines and enhanced exemptions, retirees can now plan their taxes more efficiently and file their returns with ease through trusted platforms like TaxBuddy.
Table of Contents
Understanding Pension Income Taxation in India
Pension is considered a form of salary under the Income Tax Act, 1961, as it is paid by an employer after retirement. The taxation of pension income depends on whether it is commuted or uncommuted. Pensioners receive this amount either periodically (monthly) or in a lump sum. The monthly pension is treated as regular income and taxed under the head “Income from Salary,” while the lump sum or commuted pension may be partly or fully exempt, depending on the type of employment and retirement conditions. Understanding these distinctions helps retirees plan their taxes efficiently and avoid unnecessary deductions.
Uncommuted Pension – Taxability and Deductions
Uncommuted pension refers to the regular monthly pension received by a retired employee. It is fully taxable as salary income, just like any other monthly income. However, deductions under Sections 80C, 80D, and 80TTB may help reduce the tax burden. Pensioners can also claim the standard deduction of ₹75,000 (as per Budget 2025 updates). The payer, usually a bank, deducts TDS under Section 192 before crediting the pension amount. Pensioners should verify the TDS details through Form 26AS or AIS to ensure accurate reporting while filing their income tax return.
Commuted Pension – Exemption Rules for FY 2025-26
Commuted pension is the lump sum amount received by surrendering a portion of the regular pension. For government employees, the entire commuted pension is fully exempt from tax. For non-government employees, partial exemption is available depending on whether they also receive gratuity. If gratuity is received, one-third of the commuted pension is exempt. If gratuity is not received, one-half of the commuted pension is exempt. The remaining amount, if any, is added to taxable income. These exemptions are designed to offer relief to retirees who opt for lump sum payments.
Is Commuted Pension Fully Exempt Under the New Tax Regime?
Under the new tax regime (Section 115BAC), exemptions and deductions are limited. However, the exemption for commuted pension remains unchanged. Government employees continue to enjoy full exemption on their commuted pension, while non-government employees can still claim partial exemptions as per existing rules. Since the new regime primarily removes deductions related to investments and allowances, pension-related exemptions such as commutation relief remain unaffected. Pensioners must compare both regimes before opting for one, as overall tax benefits can vary.
How Family Pension Is Taxed and Deducted
When a pensioner passes away, the pension received by the spouse or family is called family pension. It is taxed under the head “Income from Other Sources,” not under “Salaries.” Family pensioners can claim a deduction under Section 57(iia) — ₹15,000 or one-third of the pension amount received (whichever is lower). The payer may not always deduct TDS, so it is the recipient’s responsibility to declare this income accurately in their return. Using professional tax-filing platforms ensures that family pension is reported correctly under the appropriate section.
Unified Pension Scheme (UPS) and Its Tax Benefits
The Unified Pension Scheme (UPS) was introduced to simplify the retirement structure and ensure secure post-retirement income. Contributions made by employees and employers under UPS are treated similarly to the National Pension System (NPS) for tax purposes. Deductions may be claimed under Section 80CCD(1) and 80CCD(2) within prescribed limits. Upon retirement, partial withdrawals or commutations may also qualify for exemptions depending on the contribution period and the payout structure. This ensures continuity of tax benefits for pensioners under the evolving pension framework.
Tax Filing Rules and Exemptions for Pensioners
Pensioners must file income tax returns if their total income exceeds ₹3 lakh (or ₹5 lakh for senior citizens). The income is reported under the “Salary” section for regular pension and “Other Sources” for family pension. Standard deductions and applicable exemptions must be claimed to avoid overpayment of taxes. Senior and super senior citizens enjoy higher exemption limits and simplified filing procedures. Pensioners can use e-filing platforms like TaxBuddy for accurate return preparation and faster verification through Aadhaar-linked bank accounts.
Deductions Available for Pensioners Under the Income Tax Act
Pensioners are eligible for several deductions that help reduce tax liability. These include:
Section 80C: Up to ₹1.5 lakh for specified investments and payments.
Section 80D: Medical insurance premium up to ₹50,000 for senior citizens.
Section 80TTB: Interest income up to ₹50,000 from savings and fixed deposits.
Section 57(iia): Deduction for family pension as discussed earlier. Additionally, the standard deduction of ₹75,000 (FY 2025-26) automatically applies to pensioners. Claiming these deductions correctly ensures minimal tax outgo and compliance with current tax rules.
Pension Declaration in Bank Forms and TDS Compliance
Before receiving pension payments, retirees must submit Form 15H (for senior citizens) or Form 15G (for others) to avoid unnecessary TDS deduction if their total income falls below the taxable limit. Banks act as deductors under Section 192, and TDS is applied based on the estimated annual pension. Pensioners should regularly review their Form 26AS or Annual Information Statement to verify that all TDS entries match the actual pension credited. This ensures smooth filing and prevents refund delays.
Comparing Pension Taxation Under Old vs New Tax Regime
Under the old tax regime, pensioners can claim multiple deductions such as 80C, 80D, and 80TTB, along with standard deductions. In contrast, the new regime offers lower tax rates but removes most exemptions. For retirees with higher medical expenses, investments, or housing deductions, the old regime often proves more beneficial. However, those with minimal deductions and lower pension amounts may benefit from the simplified structure of the new regime. A careful computation of tax payable under both regimes helps in choosing the right option.
Practical Example – How Pension Taxation Works in FY 2025-26
Consider Mr. Sharma, a retired employee receiving ₹60,000 per month as pension. His annual pension is ₹7,20,000. After claiming a standard deduction of ₹75,000 and Section 80D deduction of ₹50,000 for medical insurance, his taxable income reduces to ₹5,95,000. Applying the old regime slab rates, his effective tax is minimal due to the Section 87A rebate available for incomes up to ₹5 lakh. This example highlights how claiming eligible deductions helps pensioners minimize tax liability while maintaining compliance.
Conclusion
Understanding the taxation rules for pension income ensures better financial planning and compliance. Pensioners should report both commuted and uncommuted components accurately and claim deductions under relevant sections. TaxBuddy simplifies this process with its guided filing system, automated computation, and expert support for retirees.
For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Is pension income considered salary or other income for tax purposes? Uncommuted pension, which is received monthly or periodically, is considered part of salary income under the Income Tax Act. It is taxed similarly to regular salary received from an employer. However, family pension, which is received by a dependent after the death of the employee, is not treated as salary income. Instead, it is taxable under the head “Income from Other Sources.” This distinction determines which deductions and exemptions can be claimed while filing the return.
Q2. Can a pensioner claim standard deduction under the new tax regime? Yes. As per Budget 2025 provisions, all salaried individuals, including pensioners, are eligible to claim a standard deduction of ₹75,000 under both the old and new tax regimes. This deduction automatically reduces taxable income, offering direct relief without the need for any specific investment or documentation.
Q3. What is the difference between commuted and uncommuted pension? Uncommuted pension refers to the regular, periodic pension received by a retiree—similar to a monthly salary—and is fully taxable. Commuted pension, on the other hand, is the lump sum amount received when a part or full pension is withdrawn in advance. For government employees, commuted pension is fully exempt from tax. For non-government employees, one-third of the commuted pension is exempt if they also receive a gratuity, or one-half if no gratuity is received.
Q4. How is family pension taxed? Family pension is taxable under the head “Income from Other Sources.” The recipient, usually the spouse or dependent family member of the deceased employee, is eligible for a standard deduction equal to one-third of the pension amount received or ₹15,000, whichever is lower. The remaining amount is added to the total taxable income of the recipient and taxed at applicable slab rates.
Q5. Are pensioners eligible for Section 80C deductions? Yes. Pensioners can claim deductions under Section 80C for eligible investments up to ₹1.5 lakh per financial year. Qualifying investments include life insurance premiums, contributions to the Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), and tax-saving fixed deposits. Even after retirement, these deductions remain available as long as the taxpayer meets the investment conditions.
Q6. Is TDS deducted from pension income? Yes. Under Section 192, banks are required to deduct Tax Deducted at Source (TDS) on monthly pension payments if the total annual pension income exceeds the basic exemption limit. Pensioners should verify TDS details through Form 26AS or AIS to ensure proper credit is reflected before filing their Income Tax Return (ITR).
Q7. Can pensioners opt for the new tax regime? Yes. Pensioners have the option to choose between the old and new tax regimes each financial year while filing their return. The new tax regime offers lower tax rates but restricts most exemptions and deductions, except the standard deduction. Pensioners should compare both regimes to determine which offers greater tax savings based on their income and investment pattern.
Q8. Are government and private pensioners taxed differently? Yes, particularly with respect to commuted pension. For government pensioners, the entire commuted pension is exempt from tax. For private-sector employees, only a portion of the commuted pension is exempt—either one-third or one-half depending on whether gratuity is received. Other components like uncommuted pension and family pension are taxed similarly for both groups.
Q9. How can senior citizens reduce tax on pension income? Senior citizens can lower their taxable income by claiming deductions under Sections 80D (for medical insurance and preventive health check-ups) and 80TTB (for interest income from savings and fixed deposits). They can also invest in Senior Citizens Savings Schemes (SCSS), PPF, or tax-saving bonds to claim additional deductions under Section 80C. These measures together help minimize tax liability on pension income.
Q10. What documents are needed for filing ITR for pension income? The essential documents include Form 16 or Pension Certificate issued by the disbursing bank, Form 26AS or AIS showing TDS details, bank statements reflecting pension credits, and investment proofs for deductions under sections like 80C or 80D. Having these documents ensures accurate reporting and prevents discrepancies in tax assessment.
Q11. Can pension income be split between spouses for tax benefits? No. Pension income is taxable solely in the hands of the recipient. Even if both spouses have shared financial responsibilities, pension cannot be split or transferred to the other spouse for reducing tax liability. The person whose name appears as the pension recipient in official records remains solely responsible for declaring and paying taxes on it.
Q12. How does TaxBuddy help pensioners file their returns? TaxBuddy offers an AI-driven filing experience designed specifically for retirees and pensioners. The platform auto-identifies pension income, applies relevant deductions such as standard deduction, 80C, and 80TTB, and verifies TDS credits from Form 26AS. Its expert-assisted plans also ensure that every exemption, including commuted pension benefits, is accurately applied. This results in error-free filing and maximum tax savings with minimal effort.
