Commutation of pension

Commutation of pension is the exchange of a part of a monthly central government pension for a one-time lump sum, under the Central Civil Services (Commutation of Pension) Rules, 1981. Rule 5(1) allows a pensioner to commute a fraction not exceeding 40% of the pension. The monthly basic pension is then reduced by that portion, and Rule 10-A restores it 15 years after the date the reduction became operative. The lump sum is exempt from income tax, and dearness relief continues to be paid on the full, un-commuted pension throughout.

Those three features, the tax exemption, the restoration, and the undiminished dearness relief, are what separate commutation from a sale of pension income. A commercial annuity surrendered for cash is surrendered for good. A commuted pension comes back, and the inflation adjustment on it never goes away in the first place.

The decision is taken once, at or near retirement, and the arithmetic that governs it is fixed by a table dating from 2 September 2008. Missing the one-year application window turns a paperwork exercise into a medical examination and costs the pensioner a lower factor. This article sets out who may commute, the 40% limit, the lump-sum formula and the commutation factor, the three application routes and their deadlines, when a medical examination is required, the reduced pension and its restoration, the dearness relief position, the tax treatment, what happens on death before restoration, further commutation after a retrospective revision, and the standing demand to cut the restoration period to 12 years. Every load-bearing figure is cited to the rules, the governing Office Memorandum, or the judgment.

Who may commute

Commutation is open to a government servant appointed on or before 31 December 2003 who draws a pension under the CCS (Pension) Rules, 2021, which is the cohort Rule 2 of the CCS (Commutation of Pension) Rules, 1981 applies the Rules to. Superannuation pension, retiring pension on voluntary retirement, compensation pension, invalid pension, compassionate allowance and pro-rata pension on absorption in a public sector undertaking are all commutable; what differs between them is whether a medical examination is required, not whether commutation is available.

Two categories are outside the Rules entirely. An employee on the National Pension System has no defined-benefit pension to commute: the retirement corpus is split between a lump-sum withdrawal and an annuity purchase under the Pension Fund Regulatory and Development Authority regulations, and the withdrawal is a scheme feature rather than a commutation. Under the Unified Pension Scheme, the nearest analogue is the final withdrawal of up to 60% of the individual corpus under regulation 15(2), and the structural difference is decisive: that withdrawal reduces the assured payout permanently, whereas a commuted pension is restored after 15 years.

Rule 4 bars commutation while departmental or judicial proceedings are pending against the government servant or pensioner. The application is entertained only after the proceedings conclude and a final pension is sanctioned, which is why a pensioner drawing a provisional pension commutes under the separate machinery of Rule 9 rather than under the ordinary route.

The 40% limit

A central civil pensioner may commute a fraction not exceeding 40% of the pension, under Rule 5(1) of the CCS (Commutation of Pension) Rules, 1981. The ceiling was raised from one-third to 40% on the recommendation of the Fifth Central Pay Commission. Rule 5(3) provides that a fraction of a rupee resulting from the commutation is ignored, so the commuted portion is always a whole number of rupees.

The fraction bites on the basic pension, not on the pension plus dearness relief. A pensioner sanctioned a basic pension of Rs. 50,000 a month may commute up to Rs. 20,000 of it, leaving Rs. 30,000 as the reduced monthly basic pension. The 40% is a ceiling and not a requirement: a pensioner may commute 10%, 25%, or nothing.

Armed forces personnel are governed by their own commutation rules and may commute up to 50% of the pension. The commutation factor table is applied identically in both cases; what differs is the size of the slice that may be converted.

The lump sum: formula and factor

The lump sum equals the commuted monthly pension multiplied by the commutation factor for the pensioner’s age and multiplied by 12, under Rule 8 read with the Table appended to the CCS (Commutation of Pension) Rules, 1981. The Table in force took effect on 2 September 2008 and is built on the LIC (1994-96) Ultimate mortality table at 8% interest, so it does not change when a pay commission revises pay.

The Table is keyed on age next birthday, which is the single most commonly misread element of the calculation. An employee retiring on superannuation at 60 does not take the factor shown against 60; the commutation becomes absolute on the day following retirement, by which time the age next birthday is 61, so the applicable factor is 8.194. The factor of 8.287 shown against age 60 applies to a pensioner whose commutation becomes absolute before the sixtieth birthday, which in practice means voluntary retirement.

Factors from the Table appended to the CCS (Commutation of Pension) Rules, 1981, effective 2 September 2008. The lump-sum column is the commuted monthly pension of Rs. 20,000 multiplied by the factor and by 12.

The factor falls as age rises because the reduction in pension will run for fewer expected years, so the government recovers less and pays less for the same slice. The full range runs from 9.090 at age 40 to 4.611 at age 81. The commutation factor table article carries every value and the mortality and interest basis behind them.

Applying: the three routes and their deadlines

Which of three routes an applicant falls into decides the form, whether a medical examination is required, the date the commutation becomes absolute, and therefore the factor. The route is fixed by when the application reaches the head of office relative to retirement.

Routes and dates under the CCS (Commutation of Pension) Rules, 1981, Rules 6, 12, 13 and 19.

The date the commutation becomes absolute, fixed by Rule 6, is the date on which the entitlement crystallises. It determines the age against which the factor is read, the date from which the pension is reduced, and the date from which the 15 years to restoration begins to run. Two of the three routes therefore reward promptness in a directly monetary way.

Rule 7 allows an applicant to nominate, in Form 5, a person to receive the commuted value if the applicant dies after the commutation has become absolute but before the money is paid. Failing a nomination the amount goes to the family under Rule 51(1)(b) of the Pension Rules, and failing that to the legal heirs. Rule 13(3)(d) makes the converse position explicit: where a government servant applies in Form 1-A but dies before superannuation, the government bears no liability for the commuted value, because the commutation never became absolute.

When a medical examination is required

A medical examination is required wherever the applicant is outside the classes listed in Rule 12, and wherever a pensioner within those classes applies more than one year after the date of retirement. Rule 12 covers superannuation pension, retiring pension, compensation pension, pension sanctioned after departmental or judicial proceedings conclude, and pro-rata pension on absorption in a public sector undertaking with an option to draw a monthly pension. Rule 18 brings invalid pension, pension on compulsory retirement as a penalty, compassionate allowance, and late applicants under Rule 12 into the medical route.

The machinery sits in Chapter IV of the Rules. The applicant files Form 2 under Rule 19; the head of office writes to the chief administrative medical authority in Form 3 under Rule 20; the examination is to be held before the applicant’s next birthday if that is possible, under Rule 21; and the medical authority records its findings in Form 4 under Rule 25. Rule 22 requires a medical board in the listed cases and otherwise permits an officer not below the rank of civil surgeon or district medical officer. The fee is borne by the applicant under Rule 23, failure to appear is treated as withdrawal of the application under Rule 24, a second examination may be sought after one year before a medical board at the applicant’s own expense under Rule 26, and Rule 27 provides an appeal against the findings.

The financial cost of the medical route is not the fee. It is the factor. Because the commutation becomes absolute only when the medical authority signs Part III of Form 4, the age next birthday is taken as at that later date, and the applicant frequently crosses a birthday in the interval. A pensioner who retires voluntarily at 55 on a basic pension of Rs. 40,000 and commutes the maximum Rs. 16,000 within the one-year window takes the factor 8.572 against age next birthday 56, giving Rs. 16,45,824. The same pensioner applying after the window, and examined after turning 56, takes 8.512 against age next birthday 57, giving Rs. 16,34,304. The delay costs Rs. 11,520 and adds a medical board.

The reduced pension and its restoration after 15 years

The commuted portion is restored on completion of 15 years from the date the reduction in pension became operative under Rule 6, under Rule 10-A of the CCS (Commutation of Pension) Rules, 1981. Restoration is automatic and requires no fresh application, though a bank may ask for the prescribed proforma and will obtain the date of commutation from the pay and accounts office through the Central Pension Accounting Office where the pension payment order does not carry it.

The 15 years runs from the date of the reduction, not from the date of retirement, and the distinction is worth money to no one but is worth accuracy to everyone. Where commutation becomes absolute on the day after superannuation, the two dates are effectively the same. Where the payment follows a medical examination or a later pay revision, the reduction begins on that later date and the restoration date moves back by exactly the same interval. The restoration of commuted pension article works through the reckoning.

The 15-year figure came from the Supreme Court. In Common Cause (A Registered Society) versus Union of India, decided on 9 December 1986 and reported at 1987 (1) SCC 142, the Court fixed restoration at 15 years, effective 1 April 1985, and the Government gave effect to it by Office Memorandum No. 34/2/86-P&PW dated 5 March 1987. Rule 10-A was inserted into the 1981 Rules to carry the direction into the rulebook.

The arithmetic that drives the recurring demand to shorten the period is straightforward. A pensioner who commutes Rs. 20,000 a month receives Rs. 19,66,560 and forgoes Rs. 20,000 a month, so the undiscounted recovery is complete in 98.328 months, about eight years and two months. The 7th Central Pay Commission put the recovery at about twelve years once the interest element in the lump sum is counted, and kept the restoration period at 15 years on the basis that the government assumes the risk of early death and recovers nothing from the family. The extra period prices that risk.

Dearness relief on the full pension

Dearness relief is calculated on the full, un-commuted basic pension, not on the reduced pension. The Department of Pension and Pensioners’ Welfare put this beyond argument in Office Memorandum No. 42/15/2022-P&PW(D)/1, and the entitlement itself flows from Rule 52 of the CCS (Pension) Rules, 2021. The relief is computed on the basic pension including the additional pension in old age granted from 80 years, which is itself a percentage of the un-commuted basic pension.

At the rate of 60% in force from 1 January 2026, a pensioner with a full basic pension of Rs. 50,000 who has commuted Rs. 20,000 draws a reduced basic pension of Rs. 30,000 and dearness relief of Rs. 30,000, the relief being 60% of the full Rs. 50,000 rather than of the reduced Rs. 30,000. Total monthly receipts are Rs. 60,000, against Rs. 80,000 for an identical pensioner who did not commute.

This is the feature that changes the economics. The cost of commuting is confined to the basic pension, which is frozen in nominal terms between pay commissions, while dearness relief, which grows twice a year, is untouched. As the dearness relief percentage rises across the 15 years, the commuted portion shrinks steadily as a share of what the pensioner actually receives.

Tax treatment

The commuted value of pension received by a government employee is fully exempt from income tax, with no monetary ceiling, under Section 10(10A)(i) of the Income-tax Act, 1961. For the financial year 2026-27 onward the relief sits at serial number 7 of the Table in Section 19(1) of the Income-tax Act, 2025, which took effect on 1 April 2026 and allows the entire amount without changing the treatment. Serial number 7 names commutation received under the Civil Pensions (Commutation) Rules or a similar scheme, and it reaches employees of the central government, a state government, an all-India service, the defence services, a local authority and a statutory corporation alike. Serial number 9 allows the entire amount of a commutation received from a fund specified at serial number 3 of the Table in Schedule VII.

The monthly pension is unaffected by the exemption. Whether reduced during the 15 years or restored after, it is taxable as salary under Section 17(1)(ii) and carries the standard deduction of Rs. 75,000 in the new regime, exactly as a serving employee’s salary does. Commutation therefore converts a slice of taxable monthly income into a tax-free capital receipt, and the restoration at 15 years simply increases the taxable pension from that date. A non-government employee gets a partial exemption only, of one-third of the commuted value where gratuity is also received and one-half where it is not, which is why the government pensioner’s position is the more favourable one. The income tax for pensioners article covers the wider computation.

Worked example

An employee retires on superannuation at 60 with a basic pension of Rs. 50,000 a month and commutes the maximum 40%, applying in Form 1-A three months before superannuation so the commutation becomes absolute on the day following retirement.

The commuted portion is Rs. 20,000 of monthly pension. The factor is 8.194, read against age next birthday 61. The lump sum is Rs. 20,000 multiplied by 8.194 multiplied by 12, which is Rs. 19,66,560, paid once and free of tax. The basic pension reduces to Rs. 30,000 a month from the day following retirement.

Dearness relief at 60% is computed on the full Rs. 50,000 and is Rs. 30,000 a month, so monthly receipts during the reduction are Rs. 60,000. Fifteen years later, at about 75, the Rs. 20,000 is restored and the basic pension returns to Rs. 50,000, with dearness relief at whatever rate then applies. Across the 15 years the pensioner has given up Rs. 36,00,000 of basic pension and received Rs. 19,66,560 at the outset, with the difference representing the interest and mortality assumptions built into the factor of 8.194 and the two-year cushion the Supreme Court left beyond simple recovery.

Death before restoration

Where a pensioner dies before the commuted portion is restored, the balance is not recovered from anyone. The Department of Pension and Pensioners’ Welfare clarified in Office Memorandum No. 42/15/2022-P&PW(D)/5 dated 25 October 2022 that the monthly commuted amount is not required to be deducted from family pension, and that family pension shall be paid in full without any deduction on that account.

The recovery therefore runs only against the pensioner’s own pension, only during the pensioner’s lifetime, and stops at death. A pensioner who commutes at 60 and dies at 66 has repaid six years of a fifteen-year reduction, and the family pension sanctioned to the spouse is computed on last pay under the CCS (Pension) Rules, 2021 without reference to the commutation at all. This is the risk element the 7th Central Pay Commission cited when it declined to shorten the restoration period, and it is the government’s side of the actuarial bargain.

Where restoration falls due and the pensioner dies before the arrears are drawn, the legal heirs may claim restoration arrears up to the date of death.

Further commutation after a retrospective revision

A pensioner whose pension is revised retrospectively may commute a fraction of the increase, under Rule 10 of the CCS (Commutation of Pension) Rules, 1981. This is the ordinary consequence of a pay commission: when the 7th Central Pay Commission revised pensions with effect from 1 January 2016, a pensioner who had already commuted 40% of the pre-revision pension became entitled to commute 40% of the increase as well. Where the original commutation required no medical examination, the additional commutation requires none either.

The proviso to Rule 10-A governs what follows. Where the commuted value has been paid on more than one occasion because of an upward revision of pension, each commuted amount is restored on completion of 15 years from its own date, so a pensioner can hold two restoration dates years apart. The first commutation restores 15 years after the first reduction became operative; the arrears commutation restores 15 years after the second did. Pensioners whose pension papers show a single restoration date, when two commutations were paid, should read the second date off the date of the second reduction rather than assume the two coincide. The 8th Central Pay Commission, which reports by 3 May 2027, will produce the same effect for pensions revised under its recommendations.

What commutation does not affect

Commutation reduces the pensioner’s own monthly basic pension and nothing else. Retirement gratuity is computed on emoluments and qualifying service under the CCS (Pension) Rules, 2021 and does not move when a pensioner commutes; the two are separate retirement benefits sanctioned in the same pension payment order. Qualifying service is unaffected, because commutation happens after service ends.

Family pension is fixed as a percentage of last pay drawn, not of the pension the retiree was actually receiving, so the fraction commuted never enters the calculation. The additional pension from 80 years under Rule 44(6) of the CCS (Pension) Rules, 2021 is a percentage of the basic pension, and because dearness relief and the additional pension are both reckoned on the un-commuted figure, a commuting pensioner who reaches 80 is in the same position on both as one who did not commute.

The one thing commutation does affect beyond the basic pension is the pensioner’s own liquidity at the moment of retirement, which is the whole point of it.

The demand to cut the restoration period to 12 years

No reduction of the restoration period has been ordered, and the 15-year period has just been upheld in litigation. The demand rests on the recovery arithmetic set out above: pensioners’ associations argue that the lump sum is recovered well inside 15 years and that the balance is excess recovery.

At the 34th meeting of the Standing Committee of Voluntary Agencies on 11 March 2025, pensioners’ representatives sought a cut from 15 years to 12, citing the Fifth Central Pay Commission, similar steps by several state governments, and the fall in interest rates. The reply came from the Department of Expenditure, which recorded that the issue may be included in the terms of reference of the 8th Central Pay Commission, and the item was closed. The minutes were circulated by Office Memorandum No. 4/14/2025-P&PW(D)/E-10522 dated 25 March 2025. An earlier proposal from the Department of Pension and Pensioners’ Welfare to reduce the period, made on 25 October 2012, did not receive the Department of Expenditure’s concurrence.

The courts have now taken the same view. In Union of India versus Sub Trilok Chand (Retired), neutral citation 2026:DHC:4843-DB, a division bench of the Delhi High Court dismissed a batch of petitions by retired central government, paramilitary, railway, bank and autonomous body pensioners challenging Rule 10-A. The bench held the 15-year period to be a conscious policy determination founded on actuarial evaluation, rejected the twelve-year recovery argument as a simplified financial comparison that ignores the mortality and discount assumptions embedded in the Table, and found no manifest arbitrariness under Article 14 given that both the 6th and 7th Central Pay Commissions deliberately retained the figure. A pensioner who takes the tax-free lump sum, the Court held, cannot retain that advantage while repudiating the statutory terms attached to it.

The position is therefore settled at the level of the existing rule and open only at the level of policy. Any change would come from the 8th Central Pay Commission’s report, due by 3 May 2027, followed by a government decision and an amendment to Rule 10-A. Until that happens the restoration period is 15 years, and any 12-year or 13-year figure attributed to the 8th CPC is a demand, not a decision.

Commutation compared with the Unified Pension Scheme final withdrawal

The two are not variants of one another. A commuted pension is a temporary reduction with an unimpaired inflation adjustment; a final withdrawal is a permanent one that also shrinks the base on which dearness relief is later paid, and it carries through into the family payout at 60% of the reduced figure.

Related Articles

• Restoration of commuted pension
• Commutation factor table
• Central government pension
• CCS (Pension) Rules, 2021
• Family pension
• Gratuity for central government employees
• Dearness relief
• Dearness allowance
• Additional pension in old age
• Old Pension Scheme
• National Pension System
• Unified Pension Scheme
• Voluntary retirement
• Notional increment on superannuation
• Income tax for pensioners
• Income tax for government employees
• Standard deduction
• Income-tax Act 2025
• Department of Pension and Pensioners’ Welfare
• Central Pension Accounting Office
• Department of Expenditure
• Department of Personnel and Training
• 7th Central Pay Commission
• 8th Central Pay Commission
• Central government employees in India
• Pay matrix
• Minimum pay
• Take-home salary of central government employees
• 7th CPC salary calculator

External references

• CCS (Commutation of Pension) Rules, 1981, full text (Department of Personnel and Training)
• Department of Pension and Pensioners’ Welfare
• Pensioners’ Portal
• Central Pension Accounting Office
• Income Tax Department
• Department of Expenditure, Ministry of Finance

References

1. Central Civil Services (Commutation of Pension) Rules, 1981: Rule 2 (application), Rule 4 (bar during departmental or judicial proceedings), Rule 5 (limit of 40% and the ignored fraction of a rupee), Rule 6 (date on which commutation becomes absolute), Rule 7 (nomination in Form 5), Rule 8 (commuted value from the Table), Rule 9 (provisional pension), Rule 10 (retrospective revision of final pension), Rule 12 (commutation without medical examination), Rule 13 (application in Form 1 and Form 1-A), and Rules 17 to 28 (medical examination, Form 2, Form 3, Form 4).
2. Rule 10-A, CCS (Commutation of Pension) Rules, 1981, restoring the commuted portion on completion of 15 years from the date the reduction became operative under Rule 6, with the proviso giving each separately paid commuted amount its own 15-year period.
3. Table appended to the CCS (Commutation of Pension) Rules, 1981, effective 2 September 2008, giving the commutation factor against age next birthday, including 8.287 at age 60 and 8.194 at age 61, built on the LIC (1994-96) Ultimate mortality table at 8% interest.
4. Common Cause (A Registered Society) and Others versus Union of India, Supreme Court of India, decided 9 December 1986, reported 1987 (1) SCC 142, fixing the restoration period at 15 years with effect from 1 April 1985; given effect by Office Memorandum No. 34/2/86-P&PW dated 5 March 1987.
5. Department of Pension and Pensioners’ Welfare, Office Memorandum No. 42/15/2022-P&PW(D)/5 dated 25 October 2022, clarifying that the commuted portion is not to be deducted from family pension where the pensioner dies before restoration.
6. Department of Pension and Pensioners’ Welfare, Office Memorandum No. 42/15/2022-P&PW(D)/1, clarifying that dearness relief is payable on the original basic pension before commutation.
7. Rule 52, CCS (Pension) Rules, 2021 (dearness relief to pensioners and family pensioners), and Rule 44(6) (additional pension from 80 years of age).
8. Income-tax Act, 1961, Section 10(10A)(i) (commuted pension of a government employee fully exempt) and Section 17(1)(ii) (pension taxable as salary); Income-tax Act, 2025 (Act No. 30 of 2025), in force 1 April 2026, Section 19(1) Table serial number 7, the successor provision.
9. Minutes of the 34th meeting of the Standing Committee of Voluntary Agencies held on 11 March 2025, circulated by Office Memorandum No. 4/14/2025-P&PW(D)/E-10522 dated 25 March 2025, recording the Department of Expenditure’s position that the restoration-period demand may be included in the terms of reference of the 8th Central Pay Commission.
10. Union of India and Others versus Sub Trilok Chand (Retired) and Another, High Court of Delhi, division bench, neutral citation 2026:DHC:4843-DB, upholding the 15-year restoration period under Rule 10-A.
11. Report of the 7th Central Pay Commission, on the retention of the 15-year restoration period against a recovery period of about twelve years.