Understanding the Taxation Rules for Pensions: A Comprehensive Guide

Retirement years should ideally be a time to rest and relax after a tenure of rendering service to an organization or fulfilling family responsibilities. Popularly referred to as the golden years, retirement planning takes a fair bit of planning in terms of financial responsibility. Understanding the Tax on Pension Income is one area that requires clarity and accurate information.
 

Is Pension Taxable?

Yes, pension income is taxable in India, just like regular salary income. Once an individual retires, the pension received from an employer is treated as a source of income and is taxed under the head “Salaries.” Understanding the income tax on pension ensures you plan withdrawals and exemptions wisely.

Commuted vs Uncommuted Pension 

Understanding the difference between commuted and uncommuted pension is important: 

1. Commuted Pension: 

A commuted pension is a one-time amount paid as a trade-off for part of one’s annuity pension. A commuted pension is useful to an individual who requires a lump sum amount to begin with, while the remaining balance of the pension gets credited to them periodically. To plan for your retirement, it pays to understand how this will impact your income tax on your Pension.

2. Uncommuted Pension: 

An uncommuted pension is that portion of your pension that you receive regularly without any commuted lump sum. As an element of your pension flow, which is considered income, the question of how it impacts tax deduction on pension becomes a point to consider while planning for your retirement.

H2: Deductions & Exemption under Pension Taxation

Pension Taxability under Different Scenarios

Pension income is taxed according to the income tax slabs as introduced by the Income Tax Department. For the financial year 2024-25, these are as follows:

For senior citizens who are 60 years but less than 80 years:

For super senior citizens, who are 80 years or more:

These slabs guide how the Tax on Pension Income would be calculated on the monthly pension income of the individual.

Exemptions : 

Deductions under Section 80C, 80 DDB, 80 TTB, and 80 D can help reduce the tax burden on pension income. Pensioners can claim a tax exemption of up to Rs. 1.5 lakh under Section 80C of the IT Act. When aged 60 years or more, exemptions of Rs. 2 lakhs can be claimed under various heads. These tax deductions on pension income are crucial for effective retirement planning.

H2: Which Head of Income to Report Pension Under?

When it comes to income tax filing, a pension is considered “Income from Salary”. Even though it is received after retirement, the law treats a pension similarly to a salary for tax purposes. 

Step-by-Step Process for Reporting Pension in ITR

1. Choosing the Right Form : If your only income is a pension, and your annual income is less than ₹50 lakh, you can file using ITR-1 (Sahaj). For those with higher income or multiple income sources, forms like ITR-2 or ITR-3 will be more appropriate.
2. Filling Personal Details : In the ITR, go to the “Personal Information” section. Here, select “Nature of Employment” as Pensioners. Then, pick the correct category:

• CG: Central Government pensioner
• SG: State Government pensioner
• PSU: Public Sector Undertaking
• Other Pensioners: For private sector retirees

3. Entering Pension Income : In the “Gross Total Income” tab, record pension under “Salary as per Section 17(1).” Refer to your Form 16 (issued by the pension disbursing authority) or the pension certificate from your bank/employer to avoid errors.
4. Standard Deduction : The good part is that there’s no need to manually claim deductions. The system automatically applies the standard deduction:

• ₹50,000 (Old Regime)
• ₹75,000 (New Regime)

5. Reporting TDS : If your pension provider or bank has deducted TDS, make sure to cross-check it. Enter these details in the “Tax Details” section, based on your Form 16 or Form 26AS. This prevents mismatch notices from the IT Department.

Family Pension Taxation

Unlike a regular pension, a family pension is what heirs receive after the death of the pensioner. It is taxed under “Income from Other Sources.” A standard deduction under Section 57(iia) is available, which acts as a relief for dependents by offering a tax deduction on pension income up to ₹15,000 or one-third of the pension received, whichever is lower.

Tax Slabs & TDS Rules

Here’s a quick comparison of how pension-related provisions differ under the Old and New Tax Regimes:

Recent Updates in Pension Taxation

Let’s have a detailed look at the recent updates in pension taxation: 

1. The Taxation Laws (Amendment) Act, 2025, has formally recognized the Unified Pension Scheme (UPS) and provides tax exemptions on withdrawals and lump sums under this scheme.
2. A new clause in Section 10 exempts up to 60% of the total corpus received by a subscriber on retirement from tax, provided the retirement is not penalty-based.
3. Lump sum amounts received under UPS are fully exempt from income tax.
4. Standard deduction provisions have been expanded to benefit a wider range of salaried taxpayers, including pensioners.
5. Section 80CCD has been revised to clarify the taxability of pension account amounts upon retirement, except when transferred to a pooled corpus.
6. The definition of “salary” now explicitly includes dearness allowance but excludes certain other allowances and perquisites.
7. The Finance Act 2025 aligns UPS benefits with the National Pension System for uniform tax treatment.

Taxability of Pension from Life Insurance Companies

Pension income is taxable under the head “Income from Other Sources” according to applicable slab rates. 

Regular pension/annuity payments: eligible as Income from Other Sources under the applicable slab rates.

Premiums paid:  Eligible for tax deductions under Section 80CCC or Section 80C, offering tax-saving benefits while you plan for retirement.

Compliance & Reporting Tips

1. Filing Changes: Know about any changes in compliance requirements or the tax return filing process of senior pensioners. News on new forms, documents required and procedures helps in avoiding penalties and being compliant.
2. Reporting Tips: Income Reporting: In the "Income from Salary" section of your tax return, report your gross pension income. Make sure all pension payments are reflected, and the TDS deducted is also reported.

Tax-Saving Pension Plans

1. National Pension System (NPS): Deductions up to ₹2 lakh (Sections 80C, 80CCD(1B), 80CCD(2)). 
2. NPS Vatsalya Scheme: Extra deduction of ₹50,000 for parents investing for children, over and above the ₹1.5 lakh Section 80C limit.
3. EPFO Employee’s Pension Scheme: Monthly pension for employees in the organised sector.
4. Guaranteed Pension Plans (from life insurers): Deductions under 80C/80CCC, with partial exemptions under Section 10(10A) at vesting.
5. Senior Citizen Savings Scheme (SCSS):  Interest income deduction up to ₹1 lakh under Section 80TTB

Conclusion

Choosing the right tax-saving pension plan doesn’t just secure your retirement; it also helps reduce your income tax on pension obligations.