A retired clerk gets a pension of ₹30,000 a month and wonders why tax is cut from it every month while his neighbour, a widow living on her late husband’s family pension, seems to owe almost nothing. The answer sits in how the law treats each kind of pension. Tax on pension income depends on three things: whether the money is a regular pension or a lump sum, who paid it, and who is receiving it.
This guide walks through the three cases most families meet: the regular (uncommuted) pension, the lump sum you get when you commute part of it, and the family pension paid to a spouse or child. The section numbers below are from the Income-tax Act, 2025, which applies from tax year 2026-27. The rules are general information, not personal tax advice.
Tax on pension income: regular pension is salary
If you retire from a job and draw a monthly pension from your former employer, that pension is salary in the eyes of the Act. Section 16 lists “any annuity or pension” among the items that count as salary, and the Act says “employer” includes a former employer. So the pension goes into your income under the head “Salaries”, is added to any other income, and is taxed at your slab rates.
It does not matter whether you worked for the government or a private firm. A pension drawn from a government department, a public sector bank or a company is taxed the same way. What changes is the treatment of commuted pension and family pension, which we come to below.
The standard deduction applies to your pension
Because pension is salary, the standard deduction under section 19 is available. It is the lower of the salary (here, your pension) or ₹75,000 if you are taxed under the new regime of section 202(1), and the lower of the salary or ₹50,000 in any other case. Your pension therefore comes down before slab rates apply.
As an illustration, suppose a retired employee receives ₹4.8 lakh a year in pension and has no other income. Under the new regime, ₹75,000 is deducted, leaving ₹4.05 lakh to be taxed at slab rates. Run your own numbers with the income tax calculator.
Commuted pension: when the lump sum is tax-free
Commutation means giving up a part of your future monthly pension in return for a lump sum on retirement. The Act treats that lump sum differently from the regular pension. Section 19 lists the treatment in its table of deductions from salary, and the amount you can keep tax-free depends on who your employer was.
| Who receives the commuted pension | Tax-free portion |
|---|---|
| Central or State government civil servants, members of the all-India services, defence services, and employees of local authorities or corporations set up by a Central or State Act | Entire amount |
| Other employees who also receive gratuity | Commuted value of one-third of the pension you would normally get |
| Other employees who receive no gratuity | Commuted value of one-half of the pension you would normally get |
| Pension commuted from certain funds listed in Schedule VII of the Act | Entire amount |
For the “other employers” rows, the commuted value is worked out with the recipient’s age, the state of health, the interest rate and officially recognised mortality tables. So you do not pick the figure yourself. Your pension payment order or the pension fund will tell you how much was commuted and for what sum.
A worked illustration of the one-third rule
Say a private-sector employee who has received gratuity is entitled to a pension of ₹40,000 a month and commutes 40 percent of it for a lump sum of ₹10 lakh. If 40 percent of the pension is worth ₹10 lakh, then one-third of the whole pension is worth about ₹8.33 lakh. That amount is tax-free and the remaining ₹1.67 lakh is taxed as salary income in the year of receipt. The numbers here are only to show how the wording works. Your own commuted value will come from the employer or fund.
Once part of the pension is commuted, the monthly pension you receive afterwards is lower, and that reduced pension is taxed as regular salary. The lump sum itself is a one-time event.
Family pension has its own rule
Family pension is the regular monthly amount an employer pays to a family member after an employee dies. The Act places it under “Income from other sources”, not salary. That has one practical effect: the standard deduction under section 19 is not available on it. Instead, section 93(1)(d) gives a special deduction.
- Under the new regime of section 202(1): one-third of the family pension or ₹25,000, whichever is less.
- In any other case (the old regime): one-third of the family pension or ₹15,000, whichever is less.
Say a widow receives ₹30,000 a month, or ₹3.6 lakh a year. One-third is ₹1.2 lakh, but the cap applies, so the deduction is ₹25,000 under the new regime or ₹15,000 otherwise. Taxable family pension is ₹3.35 lakh or ₹3.45 lakh respectively, before any other income. If she has little other income, the final tax can be nil or small once the basic exemption and rebate are applied. Check the current limits on the income tax calculator. The family pension limits above are from the Act as passed by Parliament. We could not read the official section page, so check the current figures against any Finance Act, 2026 amendments before you file. Tax on pension income of this kind is usually small because family pension is rarely large.
Pension that is fully exempt
Schedule III of the Act lists a few cases where pension and family pension are not included in total income at all. These are the pension of a Central or State government servant who was awarded the Param Vir Chakra, Maha Vir Chakra or Vir Chakra (or another gallantry award the Central Government notifies), the family pension paid to a member of that person’s family, and the family pension paid to the widow, children or nominated heirs of a member of the Union’s armed forces, including paramilitary forces, where the death happened in the course of operational duties under prescribed conditions.
How to report each type of pension in your return
The head you use matters, because a wrong head can create a mismatch with the tax-deducted statements. A quick map:
- Regular pension from a former employer: report under Salaries, with the standard deduction.
- Commuted pension: report the taxable portion (if any) under Salaries and claim the exempt part as the Act allows.
- Family pension: report under Income from other sources and claim the section 93(1)(d) deduction.
- Interest on your savings account, fixed deposits and other income: add these separately; they do not enjoy the pension deductions.
Pension is paid by a bank, a treasury or a company, and tax deducted from it should appear against your PAN. Before you file, check your annual information statement so that the pension and the tax deducted match what you report.
New regime or old regime for a pensioner
Your choice of regime changes the tax on pension income because the deductions differ.
Most pensioners have simple finances: a pension, some interest and perhaps rent. Under the new regime the standard deduction is higher (₹75,000 instead of ₹50,000) and the family pension deduction is higher (₹25,000 instead of ₹15,000), but you lose the old-regime deductions such as health insurance premium and the savings deductions. Someone with large medical insurance premiums, a home loan or heavy tax-saving investments should compare both regimes. Someone whose income is mostly pension and interest often finds the new regime simpler.
Do the comparison every year, since your income mix changes as deposits mature or the pension is revised. The income tax calculator lets you try both quickly. Our separate guides on the old and new tax regimes and on senior citizen tax cover the slabs and the extra benefits for age.
Pension from NPS and the Unified Pension Scheme
Government employees who joined under the National Pension System, and those who chose the Unified Pension Scheme, receive a mix of a lump sum and a pension. The Act exempts a payment from the National Pension System Trust to a Unified Pension Scheme subscriber at superannuation or voluntary retirement, up to 60 percent of the individual corpus as defined in the Department of Financial Services notification, and it separately exempts the “lump sum amount” paid under that scheme. The pension you then draw is taxed as pension income, the same way as the regular pension above. Government pensioners often forget to separate the lump sum from the monthly amount when they plan their yearly tax, so keep the two apart in your records. A simple note of the date, the source and the amount for each receipt will save time when you file. Read our guides on NPS and the Unified Pension Scheme for how those payments work.
Tax deducted by the bank for older pensioners
The Act has a category called a “specified senior citizen”. It is a resident aged 75 or more who has pension income and no other income except interest from an account in the same specified bank where the pension is credited, and who has furnished a declaration to that bank in the prescribed form. For such a person, the bank deducts tax on the total income after Chapter VIII deductions and the rebate under section 156, at the rates in force. The practical meaning is that the bank does the tax maths, so you should keep your declaration current and your account details consistent.
If your income includes anything beyond that pension and same-bank interest, the special category does not fit, so plan to check your tax position yourself.
Common mistakes to avoid
- Reporting family pension as salary and claiming the standard deduction instead of the section 93(1)(d) deduction.
- Treating the commuted lump sum as fully taxable when your employer type gives a larger exemption, or fully exempt when it does not.
- Forgetting the pension in the return because the tax deducted already looks settled.
- Ignoring a second pension, for instance one from an earlier employer, which is also added to your income.
- Not comparing the regimes after retirement, when your deductions may have changed.
Key takeaways
Tax on pension income comes down to knowing the type of pension you receive. A short summary follows.
- A regular pension is salary under section 16 and gets the standard deduction under section 19.
- A commuted pension lump sum is fully tax-free for government employees, and partly tax-free for others based on whether gratuity was received.
- Family pension is income from other sources with a deduction of one-third or ₹25,000 (new regime) or ₹15,000 (other cases).
- Pensions linked to gallantry awards, and family pensions of armed forces personnel killed in operational duty, are exempt under Schedule III.
- Compare both regimes after retirement and match your return with your annual information statement.
