Working people always worry about maintaining their financial independence in their golden years. You might have already purchased a pension plan or registered for the NPS to enjoy a financially secure future. But what happens when you start getting returns from your annuity or retirement policy? Have you ever wondered is pension taxable? Read on to understand your tax liabilities once you retire.
Is Pension Taxable?
Yes, the pension you receive from your annuity once you retire becomes your income. So, you must pay taxes based on your income bracket. Once you reach 60, you enjoy higher exemption limits, but you must still pay the required income tax. Any pension you receive gets categorized under Salaries.
What are Commuted and Uncommuted Pension?
A pension is the money you receive after retirement as a regular income support. It can come in two forms, depending on how you choose to receive it.
- Uncommuted pension is the regular pension you receive every month after retirement from employment. It is paid for life or for the period decided under the pension rules. This amount supports daily expenses such as household costs, medical needs and regular bills. Since it is received every month, it works like a steady income after retirement.
- Commuted pension is when you choose to take a part of your pension as a one-time lump sum at the time of retirement. To receive this amount, you give up a portion of your future monthly pension. After commutation, your monthly pension reduces. Pension rules usually allow commutation only up to a fixed percentage.
Both forms can exist together based on pension scheme rules. Many retirees choose to commute a part of their pension to meet large expenses like loan repayment or home renovation, while they continue to receive a reduced monthly pension for regular needs.
Taxability of Commuted and Uncommuted Pension
Tax rules for pension depend on how the pension is received and who receives it.
Uncommuted pension
To treat it as taxable income, the law considers a monthly pension from a former employer as salary income. It is added to your total income and taxed as per the slab rates you choose. Pensioners are allowed to claim a standard deduction, just like salaried employees. This deduction reduces the taxable amount of income tax on pension.
Commuted pension
Tax treatment depends on employment type.
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Government employees:
To allow full relief, the entire commuted pension is exempt from tax. No part of the lump sum becomes taxable.
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Non-government employees:
Exemption depends on whether a gratuity is received.
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- If gratuity is received, exemption applies to one-third of the pension you are entitled to receive.
- If gratuity is not received, exemption applies to one-half of the pension you are entitled to receive.
Any amount beyond the exempt portion becomes taxable under salary income.
Taxability of Family Pension
Family pension is paid to family members, usually the spouse, after the death of the pensioner. It is not treated as salary income but falls under Income from Other Sources.
A specific deduction is allowed from income tax on pension income for families. The deduction is the lower of:
- One-third of the family pension received or
- ₹25,000 per year (under the New Tax Regime) or ₹15,000 (under the Old Tax Regime)
After this deduction, the remaining amount is taxed based on the applicable income tax slab.
Taxability of Pension for Senior Citizens
Many retirees ask, is pension taxed differently for seniors? Pension income is taxable, but tax slabs differ based on the regime chosen. Under the New Tax regime (FY 2025-26), resident individuals with a total taxable income up to ₹12,00,000 pay zero tax due to an enhanced rebate.
Old Tax Regime vs New Tax Regime for Senior Citizens (FY 2025-26)
| Particulars | Old Tax Regime (Age 60–79) | Old Tax Regime (Age 80+) | New Tax Regime (All ages) |
| Basic Exemption Limit | Up to ₹3,00,000 | Up to ₹5,00,000 | Up to ₹4,00,000 |
| Next Slab | ₹3–5 lakh at 5% | ₹5–10 lakh at 20% | ₹4–8 lakh at 5% |
| Middle Slab | ₹5–10 lakh at 20% | – | ₹8–12 lakh at 10% |
| Standard Deduction | ₹50,000 | ₹50,000 | ₹75,000 |
| Zero Tax Limit (with Rebate) | Up to ₹5,00,000 | Up to ₹5,00,000 | Up to ₹12,00,000 |
How Do I Receive Pension from NPS?
Most young workers register for the National Pension System (NPS) to secure their future. You put money into your NPS Tier I account every year and get to choose how these funds get invested in the various asset classes to build a significant corpus for the future. When you are 60 and ready to retire, you can withdraw up to 60% of the amount tax-free. You must use the rest of the 40% to purchase an annuity.
Pension from Annuity
The annuity you purchase with the NPS funds provides you with a pension. You get to decide how often you receive the money. Some may opt for monthly payouts, while others prefer annual payments. Depending on your chosen plan, you may get pension payments for a fixed period or the rest of your life.
How Much Tax Do I Have to Pay?
If you’re nearing retirement, you may worry about how much of your pension is taxable. We can understand your tax liability based on the current tax slabs in old tax regime.
Income Tax for Pensioners Above 60 and Below 80
| Income Tax Slab | Tax Rates$ |
| < Rs. 3,00,000 | NIL |
| Rs. 3,00,001 to Rs. 5,00,000 | 5% |
| Rs. 5,00,001 to Rs. 10,00,000 | 20% |
| > Rs. 10,00,000 | 30% |
You won’t have to pay any tax on the money received from the annuity if your total income, including pension, for the year does not exceed Rs. 3 lakhs. $However, if you are paying tax, you must remember that the government levies a 4% health and education surcharge on the tax amount.
Income Tax for Pensioners Over 80
| Income Tax Slab | Tax Rates$ |
| < Rs. 5,00,000 | NIL |
| Rs. 5,00,001 to Rs. 10,00,000 | 20% |
| > Rs. 10,00,000 | 30% |
Pensioners over 80 do not have to pay income tax if they earn less than Rs. 5 lakhs annually.
Taxable Pension and Deductions
Although the new tax regime does not allow other kinds of deductions, pensioners can still benefit from the Rs. 50,000 standard deduction on their annual income. Additionally, retirement and other gratuity benefits have been retained in the new regime, ensuring that pensioners can enjoy a secure retirement.
If you’ve been wondering, ‘is pension taxable?’ It’s time to put your mind at ease. Although retirees have to pay income tax, they enjoy higher tax exemptions, enabling them to make the most of their pensions.
How to Report Pension Income in ITR?
Reporting taxation of pension income correctly is important to avoid notices.
- Gather Records: Collect your annual pension statement and check AIS/Form 26AS.
- Select ITR Form: ITR-1 or ITR-2 are typically used. Note that resident senior citizens aged 75+ with only pension and interest in the same bank may be exempt from filing under Section 194P.
- Report Monthly Pension: Regular pension from an employer is “Income from Salary.” However, an annuity in NPS or a private plan not linked to employment should be reported under “Income from Other Sources.”
- Commuted Pension Disclosure: While the exempt portion of a lump sum is not added to your taxable total, it must be disclosed in the “Exempt Income” schedule of your ITR.
- Family Pension: Disclose this under “Income from Other Sources” and claim the permitted Section 57(iia) deduction.
Understanding Income Tax on Pension Income
Understanding income tax on pension income is a vital part of retirement planning. Whether your pension income is taxable depends largely on whether it is commuted or uncommuted. While some portions of the NPS withdrawal are tax-free, the regular annuity in NPS remains taxable. Always review the latest slabs to ensure your taxable income for pensioners is minimised.
