Pension and income tax — what is taxed, what is exempt, with the sections

Tax on pension is where good families lose money in both directions — some pay tax on money that is exempt, others skip filing on money that is taxable. The rules below are each tied to their section of the Income-tax Act, 1961. Where the position is disputed, we say so instead of pretending it is settled.

Service pension — taxable, as salary

Your own pension is salary income in the eyes of the Act — it goes into the return the way your pay did, the salary standard deduction applies, and Dearness Relief rides along as taxable. Banks deduct TDS on pension when it crosses the threshold; the pension slip and Form 16 from the disbursing bank carry the figures.

Family pension — taxable with a deduction, with one big exception

Family pension is not salary — it is "income from other sources", and Section 57(iia) gives a deduction of one-third of the pension or ₹15,000, whichever is less — the cap is ₹25,000 under the new regime (raised by the Finance (No. 2) Act, 2024). The exception that matters most on this site: where the member died in the course of operational duties, the family pension is fully exempt under Section 10(19), subject to the prescribed conditions. If your case is a battle casualty or operational death, check this section before any tax is paid.

Commutation and gratuity — exempt

The commuted value of pension is exempt for government pensioners, defence included, under Section 10(10A)(i) — the sub-clause expressly covers "holders of posts connected with defence". The retirement or death gratuity of government employees is exempt under Section 10(10)(i).

Disability pension — the honest position

Instructions going back to 1970 exempt the disability pension of armed forces personnel — both the service element and the disability element. In 2019, CBDT Circular 13/2019 restricted the exemption to personnel invalided out, excluding those who retired normally with a disability element — and that restriction has been contested since. We state the dispute rather than a false certainty: if this is your case, take the circular and your PPO to a tax adviser before filing. [the circular's operative text to be quoted here before launch]

Agniveer money

The Seva Nidhi package is exempt from income tax, as announced with the Agnipath scheme. The Act also carries provisions for the Agniveer Corpus Fund contributions and payouts [Section 80CCH and the linked exemption — exact text to be quoted before launch].

⚠ What this page is not This is the map, not the return. Regimes, slabs and thresholds move with the Finance Act every year, and individual cases carry facts a page cannot see. Use this to know which section to stand on — and a tax adviser to file.

Frequently asked questions

Is my service pension taxable?

Yes — as salary, with the salary standard deduction. DR is taxable with it.

My mother gets family pension — how is it taxed?

As "income from other sources", minus one-third or ₹15,000 (₹25,000 in the new regime), whichever is less — unless the death was in the course of operational duties, in which case it is fully exempt under Section 10(19).

I commuted 50% of my pension — is that lump sum taxed?

No — Section 10(10A)(i) exempts it for defence pensioners.

Is my disability pension exempt?

If you were invalided out — the exemption stands on decades of instructions and the 2019 circular accepts it. If you retired normally with a disability element, the 2019 circular says no and the matter has been contested — confirm your case before filing.

Is Seva Nidhi taxed?

No — exempt, as announced with the Agnipath scheme.