A retired Subedar in Trichy paid tax for four years on money that was never taxable.
He had been invalided out with a disability, and his pension carried a disability element. Nobody told him it was exempt. His bank deducted TDS on the full amount, he filed dutifully every year, and he never questioned it — the bank had deducted it, so it must be right.
It was not. He got some of it back. Not all of it — you can only revise so far into the past.
Pensioner tax is unlike salaried tax in one specific way: the mistakes run in both directions. Salaried employees mostly under-report and owe money. Pensioners frequently over-pay, because the exemptions that apply to them are scattered across half a dozen sections and nobody at the bank is responsible for knowing them.
This guide covers what is taxable, what is not, and what you can stop paying.
First: Do You Even Have to File?
Not every pensioner does.
Section 194P exempts you from filing altogether if you are 75 or older and all of the following hold:
- Your only income is pension and interest
- The interest is earned in the same bank that pays your pension
- You submit Form 12BBA to that bank
The bank then computes your income, allows your deductions and rebate, deducts the right TDS, and you file nothing. It is a genuine convenience and it is badly under-used, largely because it requires the pension and the interest to sit in the same bank — which is worth arranging deliberately if you are approaching 75.
Everyone else files if gross total income exceeds the basic exemption limit. And note: you must also file if you want a refund of TDS already deducted, regardless of income level. For the Subedar above, that was the whole point.
What Is Exempt: The Part Nobody Tells You
This is the section that saves real money.
Commuted pension — fully exempt for government pensioners
If you commuted part of your pension at retirement and took a lump sum, that lump sum is entirely tax-free under Section 10(10A) for employees of the Central Government, State Governments, local authorities and statutory corporations.
There is no ceiling. This is significantly better than the private sector, where only one-third (if gratuity was received) or one-half (if not) is exempt.
What remains taxable is your monthly pension — the reduced amount you draw after commutation. The lump sum itself never enters your return as income.
Disability pension — exempt for armed forces personnel
For armed forces pensioners, both the service element and the disability element of a disability pension are exempt from income tax, under long-standing CBDT instruction (Circular 2/2001).
The status is worth stating precisely, because it has been contested. CBDT Circular 13/2019 attempted to restrict the exemption to personnel invalided out of service, excluding those who completed their tenure. That circular was stayed by the Supreme Court, so the earlier and broader position continues to apply.
If your bank is deducting TDS on a disability pension, that is a matter to take up with the pension disbursing authority — and if tax has already been deducted, a return is how you reclaim it.
Gratuity — fully exempt for government employees
Retirement gratuity received by Central and State Government employees is wholly exempt under Section 10(10), with no ₹20 lakh cap of the kind that applies elsewhere. The full mechanics are in the gratuity complete guide.
Leave encashment at retirement
Earned Leave encashment on superannuation is fully exempt for government employees. (Encashment during service, such as alongside LTC, is taxable — a distinction covered in the Earned Leave guide.)
What Is Taxable
Your monthly pension is taxed as Income from Salary, even though you no longer work. That has one useful consequence: you get the standard deduction — ₹75,000 under the new regime, ₹50,000 under the old.
Family pension is different. It is taxed as Income from Other Sources, not salary, because it is paid to a survivor rather than to the person who earned it. It gets its own deduction under Section 57(iia):
| Regime | Family pension deduction |
|---|---|
| New | ₹25,000 or one-third of the pension, whichever is lower |
| Old | ₹15,000 or one-third of the pension, whichever is lower |
The new-regime figure was raised to ₹25,000 with effect from AY 2026-27. Note that this deduction survives in the new regime — one of very few that do.
Also taxable: bank and post office interest, rent, capital gains, and interest on any deposits including SCSS.
The Age Exemption Trap
This one costs people money every year.
Higher basic exemption limits for senior citizens exist only under the old regime:
| Old regime | New regime | |
|---|---|---|
| Below 60 | ₹2.5 lakh | ₹4 lakh |
| Senior citizen (60–79) | ₹3 lakh | ₹4 lakh |
| Super senior citizen (80+) | ₹5 lakh | ₹4 lakh |
The new regime makes no distinction for age at all. A super senior citizen gets ₹5 lakh under the old regime and ₹4 lakh under the new.
That sounds like an argument for the old regime — and for a super senior citizen with modest income it sometimes is. But the new regime's Section 87A rebate makes taxable income up to ₹12 lakh tax-free, which for most pensioners overwhelms a ₹1–2 lakh difference in the exemption limit.
The rule: compute both. Do not choose on age alone. The old vs new regime comparison works through the break-even points.