Pension commutation explained

Updated 11 October 2026

Commutation lets a retiring central government employee give up part of their monthly pension, up to 40%, in return for a one-time lump sum. The lump sum is the monthly amount commuted × 12 × a commutation factor that depends on your age. The cut in pension lasts 15 years, after which the full pension is restored.

The commutation formula

Commuted value = monthly pension commuted × 12 × commutation factor

• Pension commuted: any amount up to 40% of your basic pension. Most retirees commute the full 40%.
• 12 turns the monthly amount into a yearly amount.
• Commutation factor comes from the table below and depends on your age next birthday. Younger retirees get a higher factor because they would have drawn the commuted pension for longer.

Age next birthday means your age on the first birthday after commutation takes effect. A person who retires at 60 is 60 on the day after retirement, so their age next birthday is 61 and their factor is 8.194.

Commutation factor table

This table has been in force since 2 September 2008 for central government pensioners under the CCS (Commutation of Pension) Rules. It is built on LIC (1994-96) mortality tables and an interest rate of 8%.

Worked example

DR and family pension are not reduced

Two things often surprise people. First, Dearness Relief is calculated on the original pension before commutation, so the cut applies only to basic pension. Second, family pension is calculated from the employee's last pay, so commutation does not reduce what the spouse later gets. Additional pension after 80 is also worked out on the original basic pension.

Restoration after 15 years

The commuted part of the pension is restored after 15 years. In the example, the officer gives up ₹20,000 × 12 × 15 = ₹36,00,000 of basic pension over 15 years in return for ₹19,66,560 now. The gap is the cost of getting the money up front. The factors assume 8% interest, so if you would otherwise borrow at a higher rate, or have a clear use for the money, commutation can make sense; if the lump sum would sit in an account earning much less, it costs you. Pensioner associations have asked the 8th Pay Commission to cut the restoration period to 12 years. No change has been made so far.

How commutation is taxed

• Government employees: the lump sum is fully exempt from income tax. This was section 10(10A) of the old Act and is now covered by section 19 of the Income-tax Act, 2025.
• Other employees: if you also receive gratuity, one-third of the full commuted value (the value of commuting 100% of the pension) is exempt; if you do not receive gratuity, one-half is exempt.
• Monthly pension stays taxable as salary, and you get the standard deduction of ₹75,000 in the new regime or ₹50,000 in the old regime. See tax on pension.

How and when to apply

• Apply in Form 1 along with your pension papers before retirement, or within one year after. No medical examination is needed in that window.
• If you apply more than a year after retirement, you must pass a medical examination, and the factor is taken for your age at that time, which is lower.
• The lump sum is paid by the pension disbursing bank or office once the Pension Payment Order (PPO) is issued. Check the commuted amount and the reduced pension on the PPO.

Should you commute?

Commutation suits people who need a large sum at retirement, for example to clear a home loan or help a child, or who can invest it sensibly. It suits less well people in poor health with no use for the money, or who want the highest possible monthly income. Remember that DR keeps growing on the full pension even while you commute, which softens the cut over time. The pension calculator shows your pension with and without commutation.