New Delhi: Pension income in India is taxable, but the rules differ depending on the type of pension received and the category of employee, making it important for retirees and their families to understand the applicable exemptions and deductions.
Under income tax rules, uncommuted pension — the regular monthly pension received after retirement — is treated as salary income and is fully taxable for both government and private sector employees. However, pensioners can claim standard deductions and other eligible tax benefits while filing returns.
The taxation rules change in the case of commuted pension, where a retiree opts to receive a lump sum amount instead of periodic payments. For Central and State government employees, commuted pension is fully exempt from tax. In the case of non-government employees, tax exemption depends on whether gratuity is received at retirement. If gratuity is paid, one-third of the commuted pension becomes tax-free; if not, up to half of the amount is exempt.
Family pension, received by the spouse or legal heir of a deceased employee, is taxed differently. It falls under the category of “Income from Other Sources” and not salary income. Taxpayers can claim a deduction of one-third of the pension amount or up to ₹15,000 under the old tax regime and ₹25,000 under the new regime, whichever is lower.
Tax experts advise pensioners to carefully disclose pension income under the correct category while filing Income Tax Returns to avoid notices or penalties. They also recommend checking Form 26AS and pension-related TDS details before submitting returns.