The recently passed Income Tax Bill 2025 in the Lok Sabha has brought welcome news for millions of pensioners across India. The bill now ensures that the entire amount of commuted pension received from approved pension funds will be completely exempt from income tax. This reform benefits not just government employees but also private sector individuals who have invested in recognised pension schemes such as the LIC Pension Fund.
Until now, only certain categories of employees enjoyed this tax relief, while non-employees receiving commuted pensions from approved funds faced full taxation under the “Income from Other Sources” category. This created an imbalance in the tax treatment of retirees, often penalising those who planned their retirement through private contributions. With the new bill, the government has levelled the field, ensuring equal tax benefits for all eligible pensioners regardless of their employment background.
Commuted pension refers to the option of receiving a lump sum payout in place of periodic monthly pension payments. For example, a pensioner may choose to receive the next ten years of pension payments in one go, providing immediate access to substantial funds for personal needs or investments. This option offers flexibility, but until now, tax treatment depended on whether the recipient was a government employee or not.
The reform was backed by recommendations from the Lok Sabha Select Committee, which identified the gap in equitable tax treatment and called for explicit provisions granting the same deduction to non-employees as enjoyed by employees. The approved change will come into effect from April 1, 2026, meaning the benefit will first reflect in income tax returns for the financial year 2026–27.
This exemption will apply to pensions received from funds approved under Section 10(10A) and Section 10(23AAB) of the Income Tax Act, 1961, including LIC Pension Fund and other funds notified by the government. The change is expected to boost post-retirement financial security, encourage more individuals to invest in pension schemes, and provide retirees with greater liquidity without the burden of additional tax.
By aligning the tax rules for all pensioners, the government is not only providing immediate financial relief but also encouraging long-term financial planning. The move reflects a broader push towards simplifying and modernising India’s tax framework to ensure fairness and inclusivity.
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