Pension Taxation: Self Pension, Family Pension and Commuted Pension – myITreturn Help Center

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AY 2026-27: Income-tax Act, 1961
Tax year 2026-27: Sections 19 and 93, Income-tax Act, 2025

The tax treatment of pension depends on who receives it and why. Pension received by a retired employee from a former employer is generally taxable as salary. Family pension received by a legal heir is taxable under income from other sources.

Self-Pension vs Family Pension

Type	Head of income	Deduction for AY 2026-27
Uncommuted pension received by retired employee	Salary	Standard deduction up to ₹50,000 under the old regime or ₹75,000 under the default new regime, limited to salary income.
Family pension received after employee’s death	Income from other sources	Lower of one-third of family pension or ₹15,000 under the old regime; lower of one-third or ₹25,000 under the new regime.
NPS or insurance annuity	Generally income from other sources	Salary standard deduction is not available merely because the payment is called a pension.

Do not report family pension as salary. This is a common error that can lead to an incorrect standard deduction and mismatch with the return schedule.

Commuted Pension

Commutation means receiving a lump sum in place of part or all of the recurring pension.

Central or State Government, local authority and specified statutory corporation employees: Commuted pension is generally fully exempt.
Other employees receiving gratuity: Exemption is generally limited to one-third of the full value of commuted pension.
Other employees not receiving gratuity: Exemption is generally limited to one-half of the full value of commuted pension.

The remaining taxable commuted pension is reported under salary. Uncommuted monthly pension remains fully taxable, subject to the standard deduction.

Example

A retired employee receives annual uncommuted pension of ₹4,80,000 under the new tax regime. The salary standard deduction is ₹75,000, so taxable pension before other adjustments is ₹4,05,000.

A widow receives family pension of ₹1,20,000 under the new regime. One-third is ₹40,000, but the deduction is capped at ₹25,000. Taxable family pension is ₹95,000 under income from other sources.

Arrears: Pension or family-pension arrears may qualify for relief under section 89. Form 10E should be filed before claiming eligible relief in the ITR.

Special Pensions

Certain disability pensions, gallantry-award pensions and specified family pensions may be exempt subject to statutory conditions and official notifications. The exemption should not be claimed merely because the pension is paid by the Government.

Documents and ITR Reporting

Pension payment order and bank pension statement.
Form 16 issued by the former employer or pension-paying bank, where applicable.
Commutation and gratuity documents.
Form 26AS and AIS for TDS and reported pension.
Family-pension proof and death certificate, where relevant.

Income-tax Act, 2025 Position

For tax year 2026-27, section 19 preserves the salary standard deduction framework and section 93 provides the family-pension deduction. FY 2025-26 and AY 2026-27 remain governed by the corresponding provisions of the Income-tax Act, 1961.

Classification first: Identify whether the payment comes from a former employer, an NPS annuity provider or because of an employee’s death. The correct head of income and deduction follow from that classification.

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