Pension, Commuted Pension and Family Pension

A monthly pension, a lump sum for commuting part of it, a family pension paid to a widow, and money drawn against a house under a reverse mortgage all look like retirement income. The tax law treats each one differently. Pension is salary. A commuted lump sum may be wholly exempt, partly exempt or taxable, depending on who paid it and whether gratuity was also received. Family pension is not salary at all, but income from other sources with its own deduction. A reverse mortgage loan is not income. This guide sets out each rule, the section that gives it under both Acts, and which survive under the new tax regime.

Which Act governs which year

• Financial year 2025-26 (assessment year 2026-27) and earlier. The Income-tax Act, 1961 applies: sections 17, 16 and 10(10A) for pension, section 57(iia) for family pension, and sections 47(xvi) and 10(43) for reverse mortgage.
• Tax year 2026-27 onwards. The Income-tax Act, 2025 applies. The counterparts are sections 16 and 19 for pension and commutation, section 93(1)(d) for family pension, and section 70(1)(zh) and Schedule III for reverse mortgage. Each is given below.
• Earlier years continue under the 1961 Act by section 536 of the 2025 Act.

Uncommuted pension is salary

Section 17(1)(ii) of the 1961 Act includes “any annuity or pension” in “salary”. Section 16(b) of the 2025 Act says the same, and section 15(2) adds that “employer includes former employer”. A pension paid by a former employer, or by a bank on the government’s behalf, is therefore taxed under the head “Salaries”. The payer deducts tax under section 192 of the 1961 Act or section 392 of the 2025 Act, and issues Form No. 16 (Form No. 130 under the 2026 Rules).

Because it is salary, the standard deduction applies to pension:

• Old regime. Under section 16(ia) of the 1961 Act, the deduction is Rs 50,000 or the salary, whichever is less.
• New regime. The proviso, inserted by the Finance Act, 2024 with effect from 1 April 2025, raises it to Rs 75,000 where tax is computed under section 115BAC(1A).

Section 19(1) of the 2025 Act, Table serial number 2, gives the same two figures: “Rs 75000 or the salary, whichever is less, where income-tax is computed under section 202(1)”, and “Rs 50000 or the salary, whichever is less, in any other case”.

Arrears of pension received in a later year can push income into a higher slab. The relief under section 89 of the 1961 Act (section 157 of the 2025 Act) is covered in Relief for Salary Arrears: Form 10E.

Commuted pension: section 10(10A)

Commutation means giving up part of the monthly pension for a lump sum. Under section 10(10A) of the 1961 Act, the treatment of the lump sum depends on who pays it.

Payer	1961 Act	2025 Act, s.19(1) Table	Exempt
Central or State Government, defence services, all-India services, local authorities and statutory corporations	s.10(10A)(i)	Sl. No. 7	Entire amount
Any other employer, where gratuity is also received	s.10(10A)(ii)(a)	Sl. No. 8(a)	Commuted value of one-third of the pension
Any other employer, where no gratuity is received	s.10(10A)(ii)(b)	Sl. No. 8(b)	Commuted value of one-half of the pension
A pension fund set up by LIC or another insurer	s.10(10A)(iii)	Sl. No. 9	Entire amount

The 2025 Act moves the relief from the list of exempt incomes into the deductions from salary in section 19(1), Table serial numbers 7 to 9. The effect is the same: the exempt part never reaches taxable salary. In both Acts the commuted value is “determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality”. Serial number 9 refers to a fund in Schedule VII, Table serial number 3: “Any fund, by whatever name called, set up by the Life Insurance Corporation of India on or after the 1st August, 1996 or any other insurer under a pension scheme”. This is the counterpart of section 10(23AAB).

A worked example for a private-sector employee who also received gratuity. Full pension is Rs 30,000 a month. The employee commutes 40 per cent and receives Rs 15,00,000.

• Commuted value of the whole pension. If 40 per cent yields Rs 15,00,000, the whole pension would yield Rs 37,50,000.
• Exempt amount. One-third of the commuted value of the whole pension is Rs 12,50,000.
• Taxable amount. The balance of Rs 2,50,000 is taxable as salary in the year of receipt.

The remaining 60 per cent of the pension, Rs 18,000 a month, is taxable as salary each month.

Under the new regime

Section 115BAC(2)(i) of the 1961 Act lists the exemptions lost under the new regime. Section 10(10A) is not among them. Section 202(2)(a)(iv) of the 2025 Act removes only Table serial number 1 of section 19(1), which is professional tax. The commutation exemption therefore applies under both regimes, under both Acts. So does the standard deduction.

Gratuity and leave encashment received on retirement are covered in Gratuity, Leave Encashment and Retirement Receipts.

Family pension is income from other sources

When an employee dies, the employer may pay a monthly pension to a member of the family. The recipient was never the employer’s employee, so the payment is not salary in the recipient’s hands. It is taxed under the head “Income from other sources”. The Act recognises this by giving family pension its own deduction under that head.

Section 57(iia) of the 1961 Act allows “a deduction of a sum equal to thirty-three and one-third per cent of such income or fifteen thousand rupees, whichever is less”. The proviso, inserted by the Finance Act, 2024 with effect from 1 April 2025 (AY 2025-26 onwards), substitutes “twenty-five thousand rupees” where tax is computed under section 115BAC(1A). The Explanation defines family pension as “a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death”.

Section 93(1)(d) of the 2025 Act carries the same definition and both limits:

• “one-third of such income or Rs 25000, whichever is less, where income-tax is computed under section 202(1)”; and
• “one-third of such income or Rs 15000, whichever is less, in any other case”.

So the limit is the lower of one-third and a fixed sum. That sum is Rs 15,000 under the old regime and Rs 25,000 under the new regime for AY 2025-26, AY 2026-27 and tax year 2026-27. For a family pension of Rs 20,000 a month (Rs 2,40,000 a year), one-third is Rs 80,000. The deduction is therefore Rs 15,000 under the old regime or Rs 25,000 under the new.

Points that follow:

• No standard deduction. The standard deduction is a deduction from salary, so it does not apply to family pension.
• Outside the salary TDS provision. Section 192(1) applies to “any income chargeable under the head ‘Salaries’”, and family pension is not chargeable under that head. Section 392 of the 2025 Act is also confined to salary. Any tax not covered by TDS is paid as self-assessment tax. It is paid as advance tax only where the senior citizen exemption in section 207(2) / section 403(3) does not apply.
• Arrears qualify for relief. Section 89 of the 1961 Act and section 157(1)(d) of the 2025 Act extend relief to arrears of family pension.
• Two new rules in the 2025 Act. Section 93(1) also deducts in full two receipts in the family’s hands under “other sources”. Clause (g) covers “commutation of pension received from a fund as specified in Schedule VII (Table: Sl. No. 3)”. Clause (h) covers “gratuity as referred in section 19(2)(g), received on the death of the employee”.

A person can receive both: their own pension as salary, and a family pension as other sources income on the death of a spouse. The two are computed separately, and each gets its own deduction.

Reverse mortgage: neither a transfer nor income

A reverse mortgage lets a senior homeowner draw money against the house, in a lump sum or in instalments, while continuing to live in it. Two provisions keep this out of tax.

• Mortgaging the house is not a transfer. Section 47(xvi) of the 1961 Act excludes from capital gains “any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government”. Section 70(1)(zh) of the 2025 Act covers transfer “of a capital asset in a transaction of reverse mortgage under a scheme notified by the Central Government”.
• The loan is not income. Section 10(43) of the 1961 Act exempts “any amount received by an individual as a loan, either in lump sum or in instalment, in a transaction of reverse mortgage referred to in clause (xvi) of section 47”. Under the 2025 Act, section 11 read with Schedule III, Table serial number 35, excludes the same amount for “Any individual”, with no conditions.

Neither exemption is removed under the new regime. Section 10(43) is not in the list in section 115BAC(2). Schedule III serial number 35 is not among the serial numbers excluded by section 202(2)(a)(i) and (ii).

Both provisions depend on the transaction being under a scheme notified by the Central Government. An arrangement outside a notified scheme does not have their protection. If the lender later sells the house to recover the loan, that sale is a transfer in its own right, and neither provision reaches it.

What to have ready

• Pension payment order and the pension-paying bank’s Form No. 16 (Form No. 130 from tax year 2026-27). These show gross pension, the standard deduction applied and TDS.
• The commutation order. This shows the percentage commuted, the lump sum and the payer. Together with proof of whether gratuity was received, it decides which serial number or sub-clause applies.
• Family pension statements, separate from any own pension, with any arrears and the years they relate to.
• The reverse mortgage agreement, showing that it is under the notified scheme, with the drawdown schedule.
• The regime decision for the year. It changes the standard deduction (Rs 50,000 or Rs 75,000) and the family pension deduction (Rs 15,000 or Rs 25,000).

Reporting and later changes

Pension goes in the salary schedule of the return. The exempt part of commuted pension is shown as a deduction from salary or an exempt allowance, as the form provides. Family pension goes in “Income from other sources”, with the section 57(iia) deduction. A reverse mortgage loan is shown as exempt income where the form asks for it. A pensioner’s ITR-1 is walked through in Filing ITR-1 for a Senior Citizen with Pension and FD Interest. The return is then verified (see E-Verifying a Return).

A mistake in the head of income can be corrected by a revised return within the time in section 139(5), or later through an updated return. Both are covered in Belated and Revised Returns and The Updated Return (ITR-U). Examples are family pension shown as salary with a standard deduction, or a fully taxed commutation that was partly exempt.

Summary

1. Fix the Act: the 1961 Act for FY 2025-26 and earlier; the 2025 Act from tax year 2026-27.
2. Tax uncommuted pension as salary (s.17(1)(ii) / s.16(b)). Deduct the standard deduction: Rs 50,000 old regime, Rs 75,000 new regime (s.16(ia) / s.19(1) serial number 2).
3. Exempt commuted pension under s.10(10A) / s.19(1) serial numbers 7 to 9: wholly for government and similar employees and LIC-type funds; otherwise the commuted value of one-third (with gratuity) or one-half (without). This applies under both regimes.
4. Tax family pension as income from other sources. Deduct the lower of one-third and Rs 15,000 (old regime) or Rs 25,000 (new regime, AY 2025-26 onwards) under s.57(iia) / s.93(1)(d).
5. Treat a reverse mortgage under a notified scheme as neither a transfer (s.47(xvi) / s.70(1)(zh)) nor income (s.10(43) / Schedule III serial number 35).
6. Report each item under its own head, and correct any error by revised or updated return.

This is the last guide in the senior citizens set. Income Tax for Senior Citizens: The Basics brings together the exemption limits, deductions and advance tax rules.