Pension is simply a compensation to the employee for the past service. Tax treatment As per Income Tax Act, 1961 tax treatment of pension in different cases is provided below.

Pension is received from UNO by the employee or his family members – It is not chargeable to tax.

Family Pension received by the family members – It is taxable in the hands of recipients u/s 56 under the head “Income from other sources”. Standard deduction is available u/s 57 which is one-third of such pension or Rs. 15,000, whichever is lower.

Pension scheme in the case of an employee (received after retirement but during his life time) who has joined the Central Government or any other employer on or after January 1, 2004.

New pension scheme is applicable to new entrants to Government service or any other employer. As per the scheme, it is mandatory for persons who come under this scheme, to contribute 10% of salary every month towards their pension account. A matching contribution is required to be made by the employer to the said account. The tax treatment under the new scheme is as follows-
1. Contribution by the employer to the notified pension scheme is first included under the head “Salaries” in hands of the employee.
2. Such contribution is deductible (to the extent of 10% of the salary of the employee) under section 80CCD.
3. Employee’s contribution to the notified pension scheme (to the extent of 10% of the salary of the employee) is also deductible under section 80CCD.
4. When pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of the recipient.
5. No deduction will be allowed under section 80C in respect of amounts on which deduction has been claimed under section 80CCD.
6. ‘Salary” for the above purpose includes dearness allowance (DA), if the terms of employment so provide, but excludes all other allowances and perquisites.
7. The aggregate amount of deduction under section 80C, 80CCC and 80CCD cannot exceed Rs. 1,00,000.

Pension received by the employee after retirement but during his life time, in any other case –
• Uncommuted pension is taxable as salary u/s 15 in the hands of a Government employee as well as a non-government employee.
• Any commuted pension received by an employee of the Central Government, State Government, Local Authority or statutory corporation is wholly exempt from tax u/s 10(10A)(i).
• Judges of the supreme court and High courts are entitled to exemption of commuted pension u/s 10(10A)(i).
• Government employees absorbed in a public sector undertaking are entitled to exemption in respect of lump sum received on commutation of pension.
• Payment in commutation in pension received by any other employee:
a. In a case where the employee receives gratuity, the commuted value of one-third of the pension which he is normally entitled to receive is exempt from tax.
b. In any other case, the commuted value of one-half of such pension is exempt from tax.

If payment in commutation of pension received by the employee exceeds the aforesaid limits, such excess is liable to tax in the assessment year relevant to the previous year in which it is due or paid. The assessee can, however, claim relief in section 89.