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.
Deductions Worth Claiming
Old regime only:
- 80TTB — ₹50,000 on interest from bank, post office and co-operative bank deposits. This is the senior citizen's most valuable deduction and it is far more generous than the ₹10,000 under 80TTA that applies to everyone else. Not available in the new regime.
- 80C — ₹1.5 lakh, including SCSS deposits, life insurance premiums and five-year tax-saving FDs
- 80D — up to ₹50,000 for senior citizens on health insurance premiums, and medical expenditure counts where no insurance is held. CGHS contributions qualify — see the CGHS complete guide
- 80DDB — treatment of specified diseases, up to ₹1 lakh for senior citizens
- 80TTA — not applicable if you are claiming 80TTB; you choose one
Available under both regimes:
- Standard deduction on pension — ₹75,000 new, ₹50,000 old
- Family pension deduction under 57(iia)
Mutual Funds, Shares and Capital Gains
This is where pensioners most often file the wrong form.
Equity shares and equity mutual funds:
| Holding period | Classification | Rate |
|---|---|---|
| Up to 12 months | Short-term (STCG) | 20% |
| Over 12 months | Long-term (LTCG) | 12.5% on gains above ₹1.25 lakh a year |
The ₹1.25 lakh LTCG exemption is per financial year, across all your equity holdings combined.
Debt mutual funds bought on or after 1 April 2023 are taxed at slab rates regardless of holding period — there is no indexation benefit and no separate long-term rate.
The critical consequence: any capital gain pushes you out of ITR-1 and into ITR-2. Redeeming a single SIP, selling a few shares, switching between fund schemes — a switch counts as a redemption — all of it triggers ITR-2.
Dividends are fully taxable at slab rates, and TDS applies above ₹10,000 from a single company.
Senior Citizens and Advance Tax
A useful relief that is regularly missed.
Under Section 207(2), a resident individual aged 60 or above with no income from business or profession is not liable to pay advance tax at all — regardless of how large the tax liability is.
You settle the whole amount as self-assessment tax before filing, and no interest is charged under Sections 234B or 234C.
If you have business or professional income, the relief does not apply.
Arrears and OROP
If you received pension arrears during the year — OROP revision, pay commission arrears, or a delayed revision — the whole amount is taxed in the year of receipt, which can push you into a higher slab for money you should have received over several years.
Section 89(1) relief fixes this, and it requires filing Form 10E on the portal before you file your return. File the return first and the relief is disallowed automatically. The step-by-step calculation is in the Section 89(1) and Form 10E guide.
Defence pensioners should also verify their pension figures against SPARSH before filing — PPO numbers changed during the SPARSH migration, and a mismatched PPO is a common cause of pension and TDS discrepancies.
Which ITR Form
ITR-1 (Sahaj) — pension, one house property, interest income, family pension, total income up to ₹50 lakh.
ITR-2 — the moment you have any of:
- Capital gains, including mutual fund or share redemptions
- More than one house property
- Total income above ₹50 lakh
- Foreign assets or income
Filing ITR-1 when ITR-2 was required makes the return defective under Section 139(9), and you get 15 days from the notice to fix it.
Filing, Step by Step
- Gather Form 16 from your pension disbursing bank or SPARSH, interest certificates from every bank, and capital gains statements from your broker or AMC
- Download AIS and TIS from the portal — these capture interest and capital gains your Form 16 will never show
- Identify your exempt income — commuted pension, disability pension, gratuity — and keep it out of taxable income
- File Form 10E first if claiming Section 89 relief on arrears
- Choose the correct form — ITR-2 if there are any capital gains
- Compare both regimes on your actual figures
- Claim 80TTB if you are on the old regime and have deposit interest
- Pay self-assessment tax if due — no advance tax interest applies if you are 60+ without business income
- Submit by 31 July 2026
- E-verify within 30 days, or the return is treated as never filed
Mistakes That Cost Pensioners Money
- ❌ Paying tax on disability pension because the bank deducted TDS
- ❌ Declaring commuted pension as income — it is fully exempt for government pensioners
- ❌ Missing 80TTB and its ₹50,000 of deposit interest, under the old regime
- ❌ Assuming the age exemption applies in the new regime — it does not
- ❌ Filing ITR-1 after redeeming mutual funds, making the return defective
- ❌ Treating family pension as salary rather than Income from Other Sources
- ❌ Not filing at all when TDS has been deducted — filing is how you get a refund
- ❌ Paying advance tax interest you were never liable for under Section 207(2)
- ❌ Filing the return before Form 10E when claiming arrears relief
Before You File
- ✅ Form 16 from the pension disbursing bank or SPARSH
- ✅ Interest certificates from every bank and post office account
- ✅ Capital gains statements from broker and AMC
- ✅ AIS and TIS reconciled
- ✅ Exempt income identified and excluded
- ✅ Form 10E filed first, if claiming arrears relief
- ✅ Correct ITR form for your income mix
- ✅ Both regimes compared
- ✅ Return e-verified within 30 days
If you are still in service rather than retired, the equivalent walkthrough is the ITR filing guide for Central Government employees, which covers GPF interest, the quarters perquisite and 80CCD(2).