Family Pension is taxed under the head "Income from other sources". Only uncommuted family pension is taxable. If family pension is commuted i.e. lumpsum amount is received then the same is not taxable.
Family pension paid as regular monthly income (uncommuted pension) by the employer to a family member of an employee in the event of his/her death. Family pension is taxable after allowing a exemption of 33.33% or Rs. 15000, whichever is less.
For example, a family member receives a monthly pension of Rs. 50,000/-. So the exemption will be Rs. 15,000/- [lower of Rs. 15,000/- or Rs. 16,665/- (Rs. 50,000*33.33%)]. Thus, the taxable family pension will be Rs. 35,000/- (Rs. 50,000 - Rs. 15,000).
Family pension to the family of armed forces personnel including para military forces is not taxable where the death of such person has occurred in the course of operational duties.