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Retirement means that your regular income has stopped, so, you are dependent on your savings and pension to manage your expenses. However, just like your pre-retirement regular income, your pension income may also be subject to personal income tax. So, understanding income tax on pension becomes essential. Read on to know latest tax rules, exemptions, and deductions applicable to your pension income....Read More
Trust of 20+ Years in Industry
Written byAbhishek Chakravarti
Taxation & Finance Writer
Published 18th February 2026
Reviewed byAlok Mishra
Last Modified 19th February 2026
Taxation & Finance Expert
What Is Pension Income?
The money you receive regularly after retirement is your pension income. This may be the payment your former employer makes to you as a reward for your work during your years of employment.
Currently, only retired government employees and armed forces personnel receive this type of pension in India. While, those in the unorganised sector may be eligible to receive fixed pension income from schemes such as the Atal Pension Yojana.
Alternatively, it may be payout from annuities plans or annuities purchased under a pension plan such as the Axis Max Life Forever Young Pension Plan. Other sources of pension income payouts that are available include investments such as the National Pension System, Senior Citizens Savings Scheme, Vaya Vandana Yojana, etc.
Whatever the source of pension, this regular payout is designed to provide steady source of income in your old age so that the retired individual remains financially secure even when income from salary or business has stopped.
Key Features of Demand Deposits
Below are some of key features of a demand deposit account:
- Liquidity: A demand deposit account allows withdrawals at any time. Moreover, in most cases, there is no restriction on the withdrawal amount. This ensures a high degree of liquidity and makes them a suitable instrument for maintaining an emergeny fund.
- Assured Returns: Demand deposits such as savings accounts offer assured returns at a pre-determined guaranteed interest rate. However, current accounts in India often do not offer any returns to the depositor.
- Minimum Balance Requirements: Some banks require customers to maintain a minimum balance in their account on a daily, monthly or quarterly basis. However, the amount required to be maintained as minimum balance in the demand deposit account differs based on the type of account chosen.
- Joint Account: There is an option to create a joint account with two or more individuals as co-depositors. In the case of such a joint account, all joint-holders have the right to deposit and withdraw funds from the demand account.
- Daily Needs: A demand deposit account allows withdrawals to be made through various instruments such as debit/ATM card, cash withdrawal at bank branch, cheque, online transfers, UPI, etc. This makes demand deposits ideal for meeting daily financial needs, as the funds can be easily transferred or withdrawn.
Types of Pension in India
In India you can receive your pension as periodic payments or choose a one-time lump sum plus regular payments in certain cases. To understand tax on pension income in India, it is important to know the different types of pension in India:
- Commuted Pension: The amount you receive as a single lump sum at the time of retirement is a commuted pension. It is a one-time payment and helps meet immediate financial requirements after you retire.
- Uncommuted Pension: Pension disbursed as periodic payments, usually monthly, is called an uncommuted pension. It provides a steady income, helping you to manage daily living expenses during retirement.
- Family Pension: This is a regular payout made out to survivors such as the spouse after the death of the primary pensioner. Family pension payouts are usually lower than the pension income received during the lifetime of the primary pensioner
- Defined Benefits Pension: In this type of pension plan, the amount payable as pension is predetermined and promised at inception. In this case, the pension income is guaranteed and remains unchanged over the entire duration of the pension.
- Defined Contribution Pension: In defined contribution pension, the pension income is not guaranteed. The final amount available as monthly payout depends on the contributions made by the individual during the accumulation phase of the pension plan.
The different types of pension income have different types of tax treatment that we will discuss in the subsequent sections.
Difference Between Commuted and Uncommuted Pension
Commuted and Uncommuted pension income are taxed differently. Below table illustrates the key differences in income tax on pension that applies to these two types of pension.
| Comparison Criteria | Uncommuted Pension | Commuted Pension |
|---|---|---|
| Payment Frequency | Monthly, Regular | One-time Lump Sum |
| Taxability | Fully Taxable as per income slab rate of the pension. | Non-taxable for former government employees. May be tax-free up to a certain extent for individuals who are not former government employees. |
| Budget 2025 Treatment | Standard Deduction applicable as per new tax regime or old tax regime. | Exemptions under Section 10(10A) apply -from April 1, 2026, full exemption will be available under the proposed income tax bill 2025. |
Is Pension Taxable in India?
Yes, in India, pension income features treatment that is similar to income from salary. However, the applicable rate of income tax on pension varies based on multiple factors. Some factors that can impact the taxability of pension income in India include the following:
- Type of Pension – Commuted or Uncommuted
- Recipient of Pension – Primary pensioner or surviving family member such as spouse
- Amount of Pension Received – This impacts the income tax slab rate applicable on the pension income
Let’s take a closer look at the tax treatment of pension income in India as per the Income Tax Act, 1961.
How is Pension Income treated Under Income Tax Act?
According to the Income Tax Act, 1961, a pension income is placed under the income head of "salary" or “Income from Other Sources”. However, the tax rules are different depending on whether the pension is commuted or uncommuted. Let’s see how the type of pension impacts income tax on pension in India.
Tax on Commuted Pension
In order to calculate income tax on commuted pension, the first step is to determine the portion of pension that is exempt from tax. The extent of exemption depends on type of employment, as discussed below:
- Government Employees: Commuted pension is fully exempt from income tax, in the case of Central Government, State Government, Local Authority, or Statutory Corporation employees.
- Non-Government/Private Sector Employees: If a non-government/private sector employee receives commuted pension, the portion of pension income that is exempt from tax differs based on whether gratuity has been received or not.
- If Gratuity is received at the time of retirement, one-third (1/3) of the transferred amount is exempt from income tax.
- If no gratuity is received, half (1/2) of the transferred amount is exempt from income tax.
Tax on Uncommuted Pension
Whether you were a government or private-sector employee, an uncommuted (monthly) pension is fully taxable as income under the head – “Income from Salary”. In this case, the income tax on pension will be calculated based on the income tax slab and rates applicable for the financial year.
Another factor that impacts income tax on pension depends on who is receving the pension payouts. This is how it works:
Another factor that impacts income tax on pension depends on who is receving the pension payouts. This is how it works:
- If the pensioner i.e. retired individual receives the pension himself or herself, it is taxed under the head "Income from Salaries". The applicable rate is based on the slab rate applicable for the fiscal and standard deduction of ₹75,000 is currently available under the new tax regime. Under the old tax regime, the standard deduction allowed is ₹50,000 in AY 26-27.
- If a family member receives the pension after the primary pensioner’s death, it is called a family pension. In this case, the pension income is taxed under the head "Income from Other Sources". The exemption allowed on family pension income is the lower of - 1/3 (one-third) of pension amount or ₹25,000 for FY 2025-26 (increased from ₹15,000 in FY 2024-25).
Exemptions and Deductions on Pension Income in India
Even though pension income is taxable, there are various ways to decrease your tax outgo. Apart from the standard deduction benefit under the applicable tax regime, you can make use of the following provisions:
Section 10(10A): Commuted Pension Exemption
As previously mentioned, the lump-sum payout in the case of a commuted pension is tax-exempt up to a certain extent. This exemption on pension plan payouts is governed as per the rules of Section 10 (10A) of the Income Tax Act. This is applicables as follows:
- If you are a private sector employee who received commutated pension and received a gratuity, u/s 10(10A), only 1/3 of your lumpsum pension payout is tax-exempt.
- If you are a private sector employee who has not received gratuity, u/s 10(10A), 1/2 of your total commuted pension payout will be exempt from tax.
- If you are a government employee, the entire commuted pension amount will be tax-free as per current rules of Section 10 (10A).
Section 80C and Other Tax Saving Options
For taxation purposes, pension income is treated similar to income from salary or income from other sources. So, pensioners can avail various tax savings options available under the old tax regime to reduce the outgo from income tax on pension. Notable options include:
Do keep in mind that the above deductions are applicable only if the pensioner has opted for the old tax regime and these deductions cannot be availed under the new tax regime.
- Section 80C: Up to ₹1.5 lakh annually on payment of life insurance premium, investments made in ULIPs, ELSS, PPF and other tax-saving instruments.
- Section 80D: Senior citizens are allowed to claim up to ₹50, 000 annually for payment of health insurance premiums for self and family.
- Section 24(b): Tax deduction on interest paid for home loan repayment with maximum limit of up to ₹2 lakh annually.
- Section 80G: Contributing to charitable organisations can help you get tax deduction benefits.
Do keep in mind that the above deductions are applicable only if the pensioner has opted for the old tax regime and these deductions cannot be availed under the new tax regime.
Example: Tax Calculation on Pension Income
If you are still unsure, an example with a calculation for income tax on pension for FY 2025-26 will give a better idea.
Calculation for Pension
Let’s assume Mr. Puri is a retired individual aged 65 years who receives monthly pension of ₹80,000. He invests ₹1.5 lakh annually in various tax saving instruments. This is how income tax on pension wil be calculated under the old tax regime and new tax regime for FY 2025-26 (AY 2026-27):
| - | Old Tax Regime | New Tax Regime |
|---|---|---|
| Annual Gross Pension Income | ₹9.6 lakh | ₹9.6 lakh |
| Tax Deduction | ₹1.5 lakh | Nil |
| Standard Deduction | ₹50,000 | ₹75,000 |
| Net Taxable Income | ₹7.6 lakh | ₹8.85 lakh |
| Income Tax on Pension | ₹64,480 | Nil (Due to Section 87A benefit for AY 26-27) |
As you can see, due to the enhanced standard deduction and Section 87A rebate
benefits, Mr. Puri will end up paying no tax on his pension income for AY 2026-27.
Summary
It must be clear by now that in India, income tax on pension is based on your specific tax bracket. Though payments received each month are fully taxable, lump-sum received as commuted pension are exempt either fully or up to some extent. The good news is that the new tax regime offers tax-free pension income of up to ₹12 lakh annually in FY 25-26. So, many pensioners can now benefit from reduced tax outgo on their pension income
FAQs on Income Tax and Pension Income
How much pension income is taxable?
Uncommuted pension is fully taxable. However, under the New Regime (FY 2025-26), individuals with net annual pension income up to ₹12 lakh .
What is the tax on family pension income?
Family pension is taxed as "Income from Other Sources." You can claim a deduction of ₹25,000 or 1/3rd of the pension, whichever is less, under current tax rules.
How is commuted pension taxed?
It is fully exempt for government employees. For others, 1/3rd is exempt if gratuity is received, and 1/2 is exempt if no gratuity is received.
Which sections provide pension tax exemptions?
Section 10(10A) for commuted pensions, Section 57(IIA) for family pensions, and Section 80C for contributions to pension funds.
How do I report pension income in my ITR?
Any pension received from an employer must be shown in the "Salaries" schedule. The family pension must be shown under "Income from Other Sources".
Is pension received from private companies taxable?
Yes, pension for private sector employees does get taxed, though some of the commuted pension amount can be tax free.
Do senior citizens get special tax benefits on pension?
Yes. Senior citizens can claim higher minimum exemption limits under the old tax regime. However, no additional benefits are are available under the new tax regime.
Can pension income be split with spouse for tax benefits?
No, the tax on pension income is for the recipient only; it cannot be passed on or split for tax-saving purposes.
ARN: Feb26/Bg/02G
Sources:
https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-2
https://www.wintwealth.com/blog/demand-deposit-account-meaning-features-and-benefits/
https://economictimes.indiatimes.com/industry/banking/finance/banking/bank-deposits-grew-by-10-in-fy25-growth-decline-from-13-recorded-in-fy24-rbi-data/articleshow/121566544.cms?from=mdr
https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-2
https://www.wintwealth.com/blog/demand-deposit-account-meaning-features-and-benefits/
https://economictimes.indiatimes.com/industry/banking/finance/banking/bank-deposits-grew-by-10-in-fy25-growth-decline-from-13-recorded-in-fy24-rbi-data/articleshow/121566544.cms?from=mdr
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