TaxHeal - GST and Income Tax Complete Guide Portal

Taxability of Pension as per Income Tax Act 2025

Here is the updated guide on the Taxability of Pension, strictly as per the provisions of the Income-tax Act, 2025 and the Income-tax Rules, 2026:

Taxability of Pension

Introduction Pension income is taxable under the head “Salaries”. While an uncommuted pension (paid periodically) is fully taxable, a commuted pension (lump sum) enjoys exemptions under specific conditions.

Taxability of Pension

Uncommuted Pension:
- Monthly pensions or annuities are taxable as “Salary” under Section 16(b).
- Family pensions are taxable as “Income from Other Sources”. Under Section 93(1)(d), a standard deduction is available: It is
  - the lower of ₹25,000 or 1/3rd of the pension if the taxpayer is under the default New Tax Regime (Section 202(1)), or
  - the lower of ₹15,000 or 1/3rd of the pension in any other case (Old Regime).
Commuted Pension:
- Government/Defence/Local Authority Employees: Payment in commutation of pension is fully exempt under Section 19(1) [Table: Sl. No. 7].
- Non-Government Employees: Under Section 19(1) [Table: Sl. No. 8], if the employee has received gratuity, 1/3rd of the commuted pension is exempt. In any other case (if no gratuity is received), 1/2 (50%) of the commuted value is exempt.
- Family Members: Payment in commutation of pension from specified funds is fully exempt.

Exemptions for Specific Pensions

Gallantry Award Recipients: Pension received by individuals awarded Param Vir Chakra, Maha Vir Chakra, Vir Chakra, or other notified gallantry awards is fully exempt under Schedule III [Table: Sl. No. 14]. This exemption is also extended to the family pension received by any family member of such armed personnel under Schedule III [Table: Sl. No. 15].
Disability Pension for Armed Forces: (Note: The specific exemption for Disability Pension for Armed Forces based on the “Press Release, Dated 20-12-2007” is not explicitly mentioned in the the Income-tax Act, 2025. ).
Family Pension for Defence Personnel: Family pension received by the widow, children, or nominated heirs of a member of the armed forces (including paramilitary forces) is fully exempt under Schedule III [Table: Sl. No. 16] if the death occurred in the course of operational duties.

National Pension System (NPS) & Unified Pension Scheme (UPS)

Contributions:
- Employee’s Contribution: Deduction up to 10% of salary is allowed under Section 123 read with Schedule XV [Paragraph 1(y)], plus an additional deduction up to ₹50,000 under Section 124(3).
- Employer’s Contribution: Under Section 124(1), employees can claim a deduction for employer contributions up to 14% of salary for Central/State Government employees. For others, it is 10%, but this is enhanced to 14% if the employee is chargeable to tax under the default New Tax Regime (Section 202(1)).
- Self-Employed: Deduction up to 20% of gross total income under Section 123 / Schedule XV [Paragraph 1(y)], plus an additional ₹50,000 under Section 124(3).
- NPS Vatsalya: The additional ₹50,000 deduction under Section 124(4) is allowed where the payment or deposit is made to the account of a minor by the parent or guardian.
Withdrawals:
- Partial Withdrawal: Under Schedule III [Table: Sl. No. 4], partial withdrawals from the NPS Trust are exempt up to 25% of the amount of contributions made by the employee or the parent/guardian of a minor.
- Final Withdrawal: Under Schedule II [Table: Sl. No. 6], up to 60% of the total amount payable at the time of closure or opting out of the NPS scheme is exempt.
- Nominee’s Receipt: Under Section 124(7), the amount received by a nominee on the death of the assessee is not deemed to be the income of the nominee.
- Unified Pension Scheme (UPS) [Superannuation/Retirement]: Under Schedule II [Table: Sl. No. 15], payments received from the NPS Trust by a UPS subscriber at the time of superannuation or voluntary retirement are tax-exempt up to 60% of the Individual corpus.
- UPS [Lump Sum Amount]: Under Schedule II [Table: Sl. No. 16], any “lump sum amount” received as per clause (vi) of Para 2 of Notification No. FX-1/3/2024-PR by a subscriber of the Unified Pension Scheme is fully exempt.