Income tax for pensioners

Income tax for pensioners turns on one distinction: a person’s own service pension is taxed under the head Salaries, while a family pension paid to a survivor is taxed as income from other sources, and the two carry different deductions. For the financial year 2026-27 the governing statute is the Income-tax Act 2025 (Act No. 30 of 2025), which took effect on 1 April 2026 and repealed the Income-tax Act 1961. A service pension is salary because Section 15(2) provides that an employer includes a former employer, and Section 16(b) provides that salary includes any annuity or pension.

That single sentence carries the practical consequence. Because the pension is salary, the pensioner gets the standard deduction under Section 19(1) Table serial 2, which is Rs. 75,000 in the new regime. A family pension has no employer behind it, so it gets no standard deduction and instead draws the smaller deduction in Section 93(1)(d).

This article works through both, and through the reliefs attached to each. It covers the tax on the monthly service pension and why most central government pensioners now pay nil, the full exemption of the commuted lump sum, the taxation of family pension and its exemptions, how a National Pension System or Unified Pension Scheme payout differs from an Old Pension Scheme pension, relief on arrears, the one-time retirement receipts, the senior-citizen deductions that survive only in the old regime, the relief from filing that the oldest pensioners get, and the choice of regime.

Every section number below is from the Income-tax Act 2025, with the repealed 1961 Act provision named alongside on first mention, because banks, pension payment orders and Form 16 will carry the old numbers for some time yet.

The Act that governs a pension from 1 April 2026

The Income-tax Act 2025 received the assent of the President on 21 August 2025 and came into force on 1 April 2026. It reduces the 1961 Act to 536 sections across 23 chapters and 16 schedules, and it repeals the 1961 Act outright. Income earned up to 31 March 2026 remains governed by the 1961 Act, so the return filed in 2026 for the year ended 31 March 2026 still uses the old numbers. The financial year 2026-27 does not.

Nothing in the substance of pensioner taxation changed. Every rate, ceiling and condition described below carried across unaltered. What changed is where each rule sits, and a pensioner or a tax preparer reading an older guide will be citing a repealed statute. The mapping for the provisions that matter to a pensioner is set out here once.

The service pension: taxed as salary

The monthly uncommuted pension a retiree draws is chargeable under the head Salaries. Section 15(1)(a) of the Income-tax Act 2025 charges salary due from an employer, and Section 15(2) states that for that purpose an employer includes a former employer, which is what brings a retired person’s pension inside the head at all. Section 16(b) then confirms that salary includes any annuity or pension.

Because it is salary, the pensioner gets the standard deduction under Section 19(1) Table serial 2: Rs. 75,000 or the salary, whichever is less, where tax is computed under the new regime in Section 202(1), and Rs. 50,000 otherwise. The pension-disbursing bank deducts tax at source under Section 392, the successor to Section 192, and issues a Form 16 exactly as an employer would, which the TDS on salary article covers.

Dearness relief forms part of the pension and is taxed with it. It is not a separate exempt allowance, so a pensioner reading a pension slip should treat basic pension and dearness relief as one taxable figure.

The reason most pensioners pay no tax is the rebate in Section 156, the successor to Section 87A. In the new regime the rebate makes the tax nil for a total income up to Rs. 12,00,000, so a pension up to about Rs. 12,75,000 a year pays nothing once the Rs. 75,000 standard deduction is applied, with marginal relief just above that. Take a pensioner drawing Rs. 60,000 a month, a pension of Rs. 7,20,000 a year:

The slab tax of Rs. 12,250 is wiped out because the total income is well below Rs. 12,00,000. A pensioner whose only income is a pension of that size need do very little.

The commuted pension: fully exempt

The lump sum a government employee takes at retirement by commuting part of the pension is fully exempt, with no ceiling. Serial 7 of the Table in Section 19(1) of the Income-tax Act 2025, which replaces Section 10(10A)(i) of the 1961 Act, exempts the entire commuted value.

Serial 7 reaches further than the equivalent leave rule. It names an employee of the Central Government, a State Government, a local authority and a statutory corporation, whereas serial 13, which exempts leave encashment, names only the Central Government and a State Government. A municipal or panchayat employee therefore keeps the full commutation exemption but loses the full leave-encashment exemption, a contrast written into the statute rather than inferred.

Two consequences follow. The reduced monthly pension that continues after commutation stays taxable as salary in the ordinary way, so commutation of pension converts a taxable stream into a tax-free lump sum while leaving the residue taxable. And the commuted portion is restored after 15 years, as the restoration of commuted pension article sets out, at which point the restored pension is again taxable as salary.

Family pension: income from other sources

A family pension paid to a spouse or dependant after the pensioner’s death is not salary, because the recipient never held the employment. It is charged under income from other sources, and that changes the deduction entirely.

There is no standard deduction on family pension. Section 93(1)(d) of the Income-tax Act 2025 instead allows a deduction of one-third of the family pension or Rs. 25,000, whichever is less, where tax is computed under Section 202(1), and one-third or Rs. 15,000, whichever is less, in any other case. The Rs. 25,000 new-regime ceiling was introduced by the Finance (No. 2) Act 2024 and carried into the 2025 Act, so the new regime is the more generous on family pension too.

Section 93(1)(d) also supplies the definition, which settles arguments about scope: a family pension is a regular monthly amount payable by the employer to a family member of an employee upon the death of that employee. A one-time death benefit is therefore not a family pension for this purpose.

Take a family pension of Rs. 20,000 a month, Rs. 2,40,000 a year. One-third is Rs. 80,000, but the deduction is capped at Rs. 25,000 in the new regime, leaving Rs. 2,15,000. That is below the Rs. 4,00,000 basic exemption, so the tax is nil. Both the enhanced family pension paid at a higher rate for a limited period after death, and the normal family pension that follows, are taxed the same way. A survivor whose only income is the family pension usually pays nothing; tax arises only when interest, rent or other income is added.

Three exemptions sit outside this. Family pension received by the widow, children or nominated heirs of a member of the armed forces, including the paramilitary forces, of the Union is fully exempt under serial 16 of the Table in Schedule III, where the death occurred in the course of operational duties in the prescribed circumstances. This replaces Section 10(19) of the 1961 Act read with Rule 2BBA. Ordinary defence family pension, where the death was not in operational duty, is taxable like any other. Separately, serial 14 of the same Table exempts the pension of a person in the service of the Central Government or a State Government who has been awarded the Param Vir Chakra, the Maha Vir Chakra, the Vir Chakra or another notified gallantry award, and serial 15 exempts the family pension received by any member of that person’s family.

Pension under the National Pension System and the Unified Pension Scheme

An NPS or UPS retiree is not taxed on the same footing as an Old Pension Scheme pensioner, and the difference is worth stating plainly because the schemes are often described as though the tax treatment were common.

Under the Old Pension Scheme the whole monthly pension is salary and the commuted lump sum is exempt without limit. Under the National Pension System the exemption is capped by proportion rather than by amount. Serial 6 of the Table in Schedule II to the Income-tax Act 2025, which replaces Section 10(12A) of the 1961 Act, exempts a payment from the National Pension System Trust on the closure of the account or on the subscriber opting out of the scheme, but only where that payment does not exceed 60% of the total amount payable at the time. The annuity bought with the balance is taxable in the year it is received, at slab rates, and it carries no dearness relief, so it does not rise with the cost of living the way an Old Pension Scheme pension does.

The Unified Pension Scheme has its own two entries. Serial 15 of the same Table exempts a payment from the National Pension System Trust to a UPS subscriber where two conditions are met: the payment is received at superannuation, on voluntary retirement, or on retirement under Rule 56(j) of the Fundamental Rules that is not treated as a penalty under the CCS (Classification, Control and Appeal) Rules 1965, and the payment does not exceed 60% of the individual corpus as defined in notification FX-1/3/2024-PR of the Department of Financial Services dated 24 January 2025. Serial 16 exempts the lump sum amount as defined in clause (vi) of paragraph 2 of that same notification.

The Rule 56(j) condition is the one to read carefully. A UPS subscriber retired compulsorily under FR 56(j) keeps the exemption, but only where that retirement is not treated as a penalty under the CCS (CCA) Rules 1965, so the character of the retirement order decides the tax outcome on the corpus.

Arrears of pension and the relief in Section 157

A pensioner who receives several years of arrears in one payment is pushed into higher slabs by the timing rather than by the income, and Section 157 of the Income-tax Act 2025, the successor to Section 89 of the 1961 Act, exists to undo that. Where total income is assessed at a rate higher than it would otherwise have been, because of arrears or advance salary, salary for more than twelve months in one tax year, a payment in the nature of profits in lieu of salary under Section 18(1), or arrears of family pension, the Assessing Officer grants relief on an application made by the assessee.

Section 157(1)(d) names arrears of family pension as defined in Section 93(1)(d) expressly. That matters, because family pension is charged under income from other sources rather than salary, and a relief drafted only around salary would have missed it. A widow who receives four years of family pension arrears after a delayed sanction is within Section 157 on the face of the statute.

The relief is not automatic. It requires an application in the prescribed form, and Section 157(2) bars relief on income on which a deduction has already been claimed under specified provisions. The Section 89 relief article works the computation through.

The one-time retirement receipts

Two large sums a government employee receives at retirement are fully tax-free, and they are worth naming because they are routinely confused with the taxable pension.

The retirement gratuity is exempt in its entirety under serial 3 of the Table in Section 19(1), which covers death-cum-retirement gratuity, with serial 4 covering retiring gratuity received under the Pension Code or Regulations applicable to the defence services. Neither carries a monetary ceiling for a government employee. The gratuity article covers the wider position, including the Rs. 25 lakh ceiling that applies under the pension rules rather than the tax statute.

The cash equivalent of unused leave paid on retirement is exempt in full under serial 13 of the Table in Section 19(1), the successor to Section 10(10AA)(i). As noted above, serial 13 names only the Central Government and a State Government, so an employee of a local authority falls to serial 14 and gets only the capped relief. Both receipts are one-time payments at retirement, distinct from the recurring pension, and neither is taxed for a central government retiree.

Senior-citizen deductions: almost all old regime

Age brings deductions, and a pensioner who moves to the new regime gives up nearly all of them. The exception is the rebate in Section 156, which is available in both.

The clearest is the basic exemption. In the old regime a senior citizen aged 60 to below 80 has a basic exemption of Rs. 3,00,000, and a super-senior citizen aged 80 and above has Rs. 5,00,000. The new regime has no age uplift at all: the basic exemption is a flat Rs. 4,00,000 for everyone. The age-based exemption is therefore an old-regime feature only, and at the top slab it is worth Rs. 2,500 to a senior citizen and Rs. 12,500 to a super-senior citizen against the new-regime figure.

Section 153 allows a deduction on interest from deposits with a banking company, a co-operative society carrying on the business of banking, or a Post Office. Section 153(2)(b) sets the ceiling for a senior citizen at Rs. 50,000 on deposits in any account, including time deposits, against Rs. 10,000 on savings deposits only for everyone else under Section 153(2)(a). This is the provision that was Section 80TTB in the 1961 Act.

That ceiling has not been raised. Section 153(2)(b) as enacted reads Rs. 50,000, and the Finance Act 2026 did not amend it: the memorandum explaining the provisions of the Finance Bill 2026 relating to direct taxes contains no reference to the deduction, to senior citizens, or to interest on deposits. The Rs. 1,00,000 figure reported in several places is the threshold below which a bank does not deduct tax at source on a senior citizen’s interest, which is a rule about collection and not about liability. Interest above the Rs. 50,000 deduction remains taxable at slab rates whether or not the bank deducts anything.

Section 126 gives a senior citizen a medical-insurance and preventive-health deduction of up to Rs. 50,000, against Rs. 25,000 generally. Section 128 allows a deduction for the treatment of prescribed diseases or ailments, ordinarily the amount actually paid or Rs. 40,000 whichever is less, and Section 128(4) substitutes Rs. 1,00,000 for that Rs. 40,000 where the person treated is a senior citizen. Section 128(2) requires a prescription from a specialist, and Section 128(3) reduces the deduction by any insurance or employer reimbursement received. All of these are old-regime only.

No return for the oldest pensioners

The Act relieves the oldest pensioners of filing altogether, and the relief is now split across three provisions where the 1961 Act had one.

Section 402(39) defines a specified senior citizen as an individual resident in India who is 75 or more at any time during the tax year, who has pension income and no other income except interest received or receivable from an account maintained in the same specified bank that pays the pension, and who has furnished a declaration in the prescribed form. That declaration is Form No. 125 under Rule 208 of the Income-tax Rules 2026, which replaced Form 12BBA under the 1962 Rules.

Section 393(1) Table serial 8(iii) then puts the obligation on the specified bank. The bank computes the total income of the specified senior citizen after giving effect to the deductions allowable under Chapter VIII and the rebate allowable under Section 156, and deducts tax on that figure. Note the chapter: deductions are in Chapter VIII of the 2025 Act, not the Chapter VI-A of the repealed Act.

Section 263(8)(b) completes it. The obligation to furnish a return does not apply to a specified senior citizen, as referred to in Section 402(39), for the tax year in which tax has been deducted under Section 393(1) Table serial 8(iii).

Two cautions. This is relief from filing, not from paying: the tax is still deducted, only by the bank instead of being computed by the pensioner. And any other income at all, whether rent, capital gains, dividends or interest from a different bank, takes the pensioner outside Section 402(39) and restores the ordinary duty to file.

The re-employed pensioner

A pensioner re-employed in government service draws both a pension and a salary, and both are chargeable under the head Salaries. They are aggregated under that one head, which produces a result that surprises people: the standard deduction in Section 19(1) Table serial 2 is capped at Rs. 75,000 or the salary, whichever is less, against the aggregate. Re-employment does not yield a second Rs. 75,000.

Take a pensioner drawing Rs. 6,00,000 of pension and Rs. 9,00,000 of re-employment salary. The aggregate under Salaries is Rs. 15,00,000, the standard deduction is Rs. 75,000 once, and the total income is Rs. 14,25,000, on which the new-regime tax is Rs. 93,750 plus 4% cess, about Rs. 97,500. The rebate in Section 156 does not reach it, because the total income exceeds Rs. 12,00,000.

The pension side is also frozen while the re-employment lasts. Rule 52(2) of the CCS (Pension) Rules 2021 bars dearness relief for the whole period of re-employment unless the three cumulative conditions in its proviso are satisfied and the certificate under Rule 52(3) is furnished, as pay fixation on re-employment sets out. Rule 52(4) exempts family pensioners from that bar outright, so a family pensioner who takes up re-employment continues to draw dearness relief on the family pension.

Tax deducted at source, returns and advance tax

The pension-disbursing bank deducts tax at source under Section 392 and issues Form 16, so for most pensioners the tax is collected through the year and the return is a reconciliation rather than a payment. A pensioner with a pension, some interest and perhaps one house property files ITR-1.

A senior citizen whose total tax works out to nil can give the bank Form 15H to stop tax being deducted on the interest. That is a different instrument from the Form No. 125 declaration described above, and giving one does not do the work of the other.

Advance tax rarely applies. Section 403(3) of the Income-tax Act 2025 provides that the liability to pay advance tax does not apply to an individual resident in India who has no income chargeable under the head Profits and gains of business or profession and who is of the age of 60 or more at any time during the tax year. Such a pensioner pays any balance as self-assessment tax with the return. A pensioner below 60, or one carrying on a business or profession, is liable to advance tax in the ordinary way.

A worked case: pension plus interest

The choice of regime is easiest to see with a pensioner who also earns interest, which is the most common second income. Take a super-senior pensioner aged 80 with a service pension of Rs. 7,20,000 a year and Rs. 4,00,000 of fixed-deposit interest.

The old regime gives this pensioner the higher Rs. 5,00,000 age-based exemption and the Rs. 50,000 deduction on the interest, and still loses outright. The rebate in Section 156 makes the whole Rs. 10,45,000 tax-free in the new regime, while the old regime taxes everything above Rs. 5,00,000 at ordinary slabs. That is the usual result for a pensioner whose total income is within about Rs. 12,00,000. The old regime pulls ahead only at higher incomes, or where deductible spending is large enough to bring the old-regime tax below the new-regime figure.

When a pensioner does pay tax

The nil outcome is common but not universal. A pensioner whose last pay was high draws a large pension: Rs. 15,00,000 a year gives a total income of Rs. 14,25,000 in the new regime after the standard deduction and a tax of about Rs. 97,500 with cess, the same as a serving officer on that income.

Capital gains, rental income, or interest large enough to carry the total past Rs. 12,00,000 also bring tax into play. Capital gains taxed at special rates are not covered by the rebate at all, as the Section 87A rebate article explains, so a pensioner with a modest pension and a one-off property sale can find the rebate unavailable on the gain even though the pension alone would have been tax-free. The reassurance that most pensioners pay nil holds for a modest pension with little other income; a well-paid retiree, or one with substantial investment income, pays tax like anyone else.

Which regime a pensioner should choose

For most pensioners the new regime wins, because the pension is tax-free up to about Rs. 12,75,000 with no deductions to claim and no proof to retain. The old regime is worth computing only where the deductions it allows are large in aggregate: the Rs. 50,000 deduction on deposit interest under Section 153(2)(b), medical insurance under Section 126, the Rs. 1,00,000 specified-disease deduction for a senior citizen under Section 128(4), Section 123 investments, and the higher age-based basic exemption together.

The arithmetic is unforgiving of half-measures. A super-senior citizen needs roughly Rs. 6,00,000 of deductions before the old regime matches the new one at an income near the rebate ceiling, which few pensioners reach on medical and interest deductions alone. The old versus new tax regime article works the comparison through in full. The short answer is that a pensioner with little beyond the pension is better off in the new regime, while one with heavy deductible spending should compute both ways before opting. A pensioner who does decide to move follows the same route as a serving employee, with no form to file, as set out in how to switch tax regime.

Related Articles

• Deductions allowed in the new tax regime
• Health and education cess
• Pay fixation on re-employment
• Income-tax Act 2025
• Fixed Medical Allowance
• Central government pension
• Family pension
• Disability and invalid pension
• Commutation of pension
• Restoration of commuted pension
• Income tax for government employees
• TDS on salary (Section 192)
• Standard deduction
• Section 87A rebate
• Section 89 relief
• Old versus new tax regime
• Section 80TTB
• Section 194P
• Senior citizen tax
• Gratuity for central government employees
• Leave encashment
• Dearness relief
• PPO and the annual life certificate
• National Pension System
• Unified Pension Scheme
• Old Pension Scheme
• Qualifying service
• FR 56(j) review
• Form 16
• Advance tax
• Take-home salary for central government employees
• Department of Pension and Pensioners’ Welfare
• Central Board of Direct Taxes
• Central government employees in India
• 7th Central Pay Commission
• Income tax calculator

External references

• Income Tax Department
• Income-tax Act 2025, Income Tax Department
• Income Tax: senior citizens and super senior citizens
• Department of Pension and Pensioners’ Welfare
• Union Budget of India, Finance Bill documents
• The Gazette of India

References

1. Income-tax Act, 2025 (Act No. 30 of 2025), assented 21 August 2025 and in force from 1 April 2026, Section 15(1) and 15(2) (salary chargeable, employer includes former employer) and Section 16(b) (salary includes any annuity or pension), replacing Section 17(1)(ii) of the Income-tax Act, 1961.
2. Income-tax Act, 2025, Section 19(1) Table: serial 2 (standard deduction, Rs. 75,000 where tax is computed under Section 202(1), otherwise Rs. 50,000); serial 3 (death-cum-retirement gratuity, entire amount); serial 4 (defence retiring gratuity); serial 7 (commuted pension of a Central Government, State Government, local authority or statutory corporation employee, entire amount); serial 13 (cash equivalent of leave salary of a Central or State Government employee, entire amount).
3. Income-tax Act, 2025, Section 93(1)(d) (family-pension deduction, one-third or Rs. 25,000 whichever is less where tax is computed under Section 202(1), one-third or Rs. 15,000 otherwise, with the statutory definition of family pension), replacing Section 57(iia) of the 1961 Act; the Rs. 25,000 new-regime ceiling was introduced by the Finance (No. 2) Act 2024.
4. Income-tax Act, 2025, Schedule III Table: serial 14 (pension of a Central or State Government servant awarded the Param Vir Chakra, Maha Vir Chakra, Vir Chakra or other notified gallantry award); serial 15 (family pension of such a person); serial 16 (family pension of the widow, children or nominated heirs of a member of the armed forces, including paramilitary forces, of the Union, where death occurred in the course of operational duties), replacing Sections 10(18) and 10(19) with Rule 2BBA of the 1961 Act.
5. Income-tax Act, 2025, Schedule II Table: serial 6 (payment from the National Pension System Trust on closure or opting out, exempt up to 60% of the total amount payable), replacing Section 10(12A) of the 1961 Act; serials 15 and 16 (Unified Pension Scheme, up to 60% of the individual corpus on superannuation, voluntary retirement or FR 56(j) retirement not treated as a penalty under the CCS (CCA) Rules 1965, and the lump sum amount, both by reference to Department of Financial Services notification FX-1/3/2024-PR dated 24 January 2025).
6. Income-tax Act, 2025, Section 157 (relief where salary or family pension is paid in arrears or in advance), with Section 157(1)(d) covering arrears of family pension as defined in Section 93(1)(d), replacing Section 89 of the 1961 Act.
7. Income-tax Act, 2025, Section 402(39) (definition of specified senior citizen), Section 393(1) Table serial 8(iii) (specified bank to deduct tax on total income after Chapter VIII deductions and the Section 156 rebate) and Section 263(8)(b) (return-filing requirement inapplicable), together replacing Section 194P of the 1961 Act; declaration in Form No. 125 under Rule 208 of the Income-tax Rules, 2026, replacing Form 12BBA under Rule 26D of the 1962 Rules.
8. Income-tax Act, 2025, Section 153(2)(a) and 153(2)(b) (deduction on interest on deposits, Rs. 10,000 generally and Rs. 50,000 for a senior citizen), Section 126 (medical insurance and preventive health check-up) and Section 128 with Section 128(4) (specified diseases, Rs. 40,000 substituted by Rs. 1,00,000 for a senior citizen), replacing Sections 80TTB, 80D and 80DDB of the 1961 Act.
9. Income-tax Act, 2025, Section 392 (deduction of tax at source from income chargeable under the head Salaries) and Section 403(3) (advance tax not payable by a resident individual aged 60 or more without income from business or profession), replacing Sections 192 and 207 of the 1961 Act.
10. Finance Act, 2026 (Act No. 4 of 2026), assented 30 March 2026, and the Memorandum explaining the provisions of the Finance Bill 2026 relating to direct taxes, which contain no amendment to Section 153 of the Income-tax Act, 2025; the Rs. 1,00,000 figure applies to the threshold for deduction of tax at source on a senior citizen’s interest income, not to the deduction under Section 153(2)(b).
11. CCS (Pension) Rules, 2021, Rule 52(2), 52(3) and 52(4) (dearness relief during re-employment, and the exemption for family pensioners).