The Income Tax Bill 2025 passed in the Lok Sabha on Monday has brought great relief to government pensioners and many other taxpayers. The new bill clearly provides that the entire amount of commuted pension will be exempted from tax, provided this pension is received from an approved pension fund.
Earlier this exemption was available only to certain categories of employees, while there are many who are not government employees, but voluntarily invest in recognised pension funds. So, the new bill has eliminated this difference and cleared the way to give equal tax relief to all eligible pensioners.
What is commuted pension?
Commuted pension means taking a lump sum amount instead of monthly instalments of pension. For example, if a pensioner wants to take his future pension of 10 years in one go, then it is called commuted pension. This gives the pensioner a large amount at once, which he can use for his needs or investment.
Who will be eligible for the benefit ?
Under the new provision, not only government employees but also private sector employees whose employers do not run a pension scheme but have themselves invested in an approved pension fund (such as LIC Pension Fund) will be eligible.
All government employees, including defence personnel, and those working in public sector companies have the pension commutation facility available for them. Besides them, those contributing to approved pension funds are also eligible.
In the previous version of the bill, tax deduction for commuted pension was not clear. The Lok Sabha Select Committee in its observation said, “The Committee, after a careful review of Clause 19, identified a gap in the equitable tax treatment of commuted pension for different types of recipients.”
The committee, therefore, recommended that a deduction for commuted pension, similar to that available to employees under Clause 19, be explicitly allowed under the head “Income from other sources” for non-employees who receive such pension from a fund. Accordingly, the Committee finds no further modifications are necessary for Clause 19 and recommend the acceptance of its remaining provisions as drafted.”
Why is this change important?
Under the current Income Tax Act, the commuted pension received by employees is completely tax-free, but for non-employee pensioners this amount was fully taxable under “Income from Other Sources”. Now the new bill 2025 will remove this inequality and ensure tax exemption for all eligible pensioners.
When will it be applicable?
This provision will be effective from April 1, 2026, i.e. its benefit will be available in the income tax return for the financial year 2026-27.
Pension schemes that are eligible
Pension funds approved under section 10(10A) and section 10(23AAB) of the Income Tax Act, 1961 such as LIC Pension Fund and other funds notified by the government will come under the purview of this exemption.
