## What is Pension?

Pension is a periodic (usually monthly) payment received by an employee after retirement. The employee can commute all or part of the monthly pension into a lump-sum by surrendering the future periodic payment.

## Two Forms of Pension

### 1. Uncommuted Pension (Monthly)

Fully Taxable for both Government and non-Government employees.

### 2. Commuted Pension (Lump-sum)

Employee Type	Exemption
Government Employee (Central, State, Local Authority, Statutory Corporation)	Fully Exempt
Non-Government Employee – Gratuity also received	1/3 × Total Full Value of Commuted Pension is exempt
Non-Government Employee – Gratuity NOT received	1/2 × Total Full Value of Commuted Pension is exempt

### Concept of 'Total Full Value of Commuted Pension'

If 60% of pension is commuted for ₹6,00,000, then full value of pension = 6,00,000 × 100/60 = ₹10,00,000. Exemption is computed on this full value, not on the actual amount received.

Worked example

### Example 1

Example 1 (Govt. Employee): Mr. A (Central Govt.) retired and received ₹8,00,000 as commuted pension and ₹15,000 p.m. uncommuted pension. → Commuted: fully exempt. Uncommuted: fully taxable.

### Example 2

Example 2 (Non-Govt., Gratuity received): Mr. B commuted 40% of pension for ₹4,00,000 and got gratuity. Full Value = 4,00,000 × 100/40 = ₹10,00,000. Exempt = 1/3 × 10,00,000 = ₹3,33,333. Taxable Commuted = ₹66,667.

### Example 3

Example 3 (Non-Govt., No Gratuity): Mr. C commuted 50% of pension for ₹5,00,000; no gratuity. Full Value = ₹10,00,000. Exempt = 1/2 × 10,00,000 = ₹5,00,000. Taxable = Nil.

⚠️ Common exam mistakes

Treating monthly (uncommuted) pension as exempt – it is fully taxable for all employees.
Calculating the exemption on the commuted amount received instead of on the Total Full Value of pension.
Allowing the 1/3 exemption when no gratuity is received – correct fraction is 1/2.
Treating family pension as Salary – family pension is taxed under IFOS with a standard deduction of ⅓ or ₹15,000, whichever is lower.

Bare-Act text Section 10(10A) · Income-tax Act, 1961 · click to expand

Section 10(10A) – (i) any payment in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme… (ii) any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed — (a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and (b) in any other case, the commuted value of one-half of such pension.

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Pension – Uncommuted & Commuted [Section 10(10A)]

Worked example

⚠️ Common exam mistakes