Income tax on pension
Updated 11 October 2026
A monthly pension from a former employer, including a government pension with Dearness Relief, is taxed as salary. You get the standard deduction (₹75,000 in the new regime, ₹50,000 in the old) and pay tax at your slab rate. A commuted (lump sum) pension is fully tax-free for government pensioners, while family pension received by a spouse or child is taxed as "income from other sources" with its own deduction.
How each type of pension is taxed
| Type | How it is taxed |
|---|---|
| Monthly pension (basic pension + Dearness Relief) | As salary; standard deduction allowed; slab rates |
| Commuted pension, government pensioner | Fully exempt |
| Commuted pension, non-government pensioner | One-third of the full commuted value exempt if you also get gratuity, one-half if you do not |
| Family pension (to the spouse or heirs) | Income from other sources; deduction of one-third or ₹25,000 (new regime) / ₹15,000 (old regime), whichever is lower |
| Annuity from NPS or an insurer | Taxed at slab rates; no standard deduction |
| Arrears of pension or DR | Taxed in the year received; relief available |
Gratuity is fully exempt for government employees, and so is leave encashment at retirement. These are one-time receipts, not pension, and are covered in gratuity rules and leave encashment.
Old or new regime for pensioners
The new regime has the same slabs for everyone, whatever your age. The old regime gives senior citizens a higher basic exemption: ₹3,00,000 for people aged 60 to 79 and ₹5,00,000 for those 80 and above. It also allows deductions such as 80C, 80D (up to ₹50,000 for a senior citizen) and 80TTB (interest up to ₹50,000 for senior citizens).
Even so, the new regime's ₹60,000 rebate, which makes taxable income up to ₹12 lakh tax-free, means many pensioners pay less or nothing under it.
New regime: ₹9,60,000 − ₹75,000 standard deduction = ₹8,85,000, plus ₹60,000 interest = ₹9,45,000. This is under ₹12 lakh, so the rebate removes all tax. Tax = nil.
Old regime: ₹9,60,000 − ₹50,000 = ₹9,10,000, plus ₹60,000 interest = ₹9,70,000, minus ₹50,000 under 80TTB = ₹9,20,000. Senior citizen slabs: 5% on ₹3,00,000 to ₹5,00,000 = ₹10,000; 20% on ₹5,00,000 to ₹9,20,000 = ₹84,000. Total ₹94,000, plus 4% cess of ₹3,760 = ₹97,760.
Even if he claimed ₹1,50,000 under 80C and ₹50,000 under 80D, his old-regime taxable income would be ₹7,20,000 and tax ₹10,000 + ₹44,000 = ₹54,000 plus ₹2,160 cess = ₹56,160. The new regime is clearly better for him.
Family pension
When a pensioner dies, the family pension paid to the spouse or eligible child is taxed in their hands as income from other sources, not as salary. The deduction is one-third of the family pension or ₹25,000 a year in the new regime (₹15,000 in the old), whichever is less. For example, a family pension of ₹30,000 a month is ₹3,60,000 a year; one-third is ₹1,20,000, so the deduction is ₹25,000 and ₹3,35,000 is taxable in the new regime. Read more in our family pension guide.
TDS on pension
The bank or treasury that pays your pension deducts TDS like an employer, based on your estimated income for the year. Give the pension disbursing bank a declaration of your regime choice and any deductions (if you choose the old regime) early in the year, so the right amount is deducted. The bank issues a Form 16 at the end of the year. If you have other income, such as interest or rent, you may need to pay advance tax unless you are a resident senior citizen with no business income, who is exempt from advance tax.
Resident senior citizens aged 75 or more whose only income is pension and interest from the same specified bank can give the bank a declaration and let it compute and deduct their tax. They then need not file a return. This facility was introduced in 2021 (section 194P of the old Act); ask your bank whether you qualify.
Pension arrears and DR
When Dearness Relief is raised with effect from an earlier date, or pension is revised after a pay commission, arrears are paid in a lump sum and taxed in the year you receive them. If that pushes you into a higher slab, claim relief under the old section 89 (now section 157) by filing the relief form. See section 89 relief on arrears.
Filing your return
Most pensioners with pension, interest and one house use ITR-1; those with capital gains or more than one house use ITR-2. See which ITR form. To estimate pension itself, try the pension calculator, and to compare regimes, the income tax calculator.