What are the income tax rules on pension for senior citizens and retirees? Key FAQs answered

Pension income in India is taxable, but how it is taxed depends on the type of pension you receive. In simple terms, a pension can either come as a regular monthly payment or as a one-time lump sum, and both are treated differently under income tax rules.

Key FAQs on pension

Yes, pension is generally taxable. But the way it is taxed depends on how you receive it, either as a monthly payment or as a lump sum.

Family pension (received after the pensioner’s death) is treated differently. It is taxed under “Income from Other Sources.” However, you do get a small relief:

You can claim a deduction of ₹15,000 or one-third of the pension, whichever is lower. This limit goes up to ₹25,000 under the default tax regime

Commuted pension is when you take a part of your pension as a lump sum instead of monthly payments.

It depends on your employment:

The lump sum (commuted pension) is fully tax-free

If you receive gratuity: One-third of the pension is tax-free

If you don’t receive gratuity: Half of it is tax-free

If family members receive a pension as a lump sum after the employee’s death, it is generally exempt from tax.

Yes, some pensions are fully exempt due to their nature. For example:

• Pension received by gallantry award winners

• Disability pension for armed forces (if service-related)

• Family pension in case of death during operational duties

The National Pension System (NPS) works a bit differently because it combines investment, retirement planning, and tax benefits.

Yes, there are tax benefits

Employee contributions qualify for deductions. This is only available under the old tax regime.

Employer contributions are also deductible (up to 10% or 14%, depending on the new or old tax regime)

You can withdraw up to 25% partially, tax-free (subject to conditions)

• Up to 60% of the corpus is tax-free

• The rest is used to buy an annuity

• If the amount goes to nominees after death, it is fully exempt

Yes. Once you start receiving a pension (annuity) from NPS, it is taxable. It is treated as “Income from Other Sources.”

Pension is taxable in most cases, but the rules vary depending on how you receive it. Lump sum benefits, government pensions, and certain special categories enjoy exemptions, while regular income is taxed like a salary.