Some retirement benefits are taxable, some are fully exempt, and others are exempt only up to a limit. The result depends on the type of receipt, the employee category, years of service, tax regime, and whether the amount is recurring or paid as a lumpsum. Retirement itself does not make every payment tax-free. This guide uses assessment year 2026-27 as its editorial baseline. Confirm the law, notified limits, and return form that apply to the year in which the income is received. Where a receipt is large or cross-border, obtain advice from a qualified tax professional.
Which retirement benefits are taxable at a glance?
Start by identifying each receipt. Do not combine pension, gratuity, leave encashment, and retirement account withdrawals into one figure before checking their separate rules. The same person may receive both exempt and taxable amounts in the year of retirement.
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Receipt
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Usual treatment
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First condition to check
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Monthly pension
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Generally taxable
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Own pension or family pension
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Commuted pension
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Fully or partly exempt
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Employer category and gratuity
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Gratuity
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Fully or partly exempt
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Employee category, coverage, and formula
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Leave encashment
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Fully or partly exempt
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Government status and least of limits
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Recognised EPF withdrawal
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Often exempt at retirement
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Qualifying continuous service
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PPF maturity/withdrawal
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Generally exempt
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Scheme and withdrawal rules
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NPS lump sum
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Eligible portion may be exempt
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Exit type and statutory limit
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Annuity payment
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Generally taxable on receipt
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Payout and recipient
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Superannuation receipt
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Depends on form and conditions
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Approved fund and event
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How is regular pension taxed?
A recurring pension paid to a retired employee by a former employer is generally taxable under the head salaries. The pensioner adds the taxable amount for the financial year to other income, claims the standard deduction available under the chosen tax regime, and applies the relevant slab, rebate, surcharge, and cess rules. For AY 2026-27, the editorial baseline is a standard deduction of ₹75,000 under the new regime and ₹50,000 under the old regime for eligible salary and pension income.
The new regime is the default, while an eligible individual without business income can compare regimes when filing. The comparison must include interest, rent, capital gains, and every deduction actually available.
Is commuted pension exempt?
Commutation means receiving part of future pension as lumpsum. Qualifying commuted pension received by Central or State Government employees, local-authority employees, and specified statutory corporation employees is generally fully exempt. For other employees, the exemption is limited and depends on whether gratuity is received.
- Where gratuity is received, one-third of the full commuted value is generally exempt.
- Where gratuity is not received, one-half of the full commuted value is generally exempt.
- The amount outside the exemption is taxable. “Lumpsum” alone does not establish an exemption.
Retain the pension payment order, commutation statement, gratuity record, and employer certificate. These documents show how the exempt and taxable portions were derived.
How is family pension taxed?
Family pension received after an employee’s death is generally taxable under Income from other sources, not salaries. The salary standard deduction therefore does not apply. A separate deduction is available: one-third of family pension, subject to the statutory cap for the chosen tax regime.
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Regime for AY 2026-27
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Family-pension deduction
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New tax regime
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One-third of family pension, capped at ₹25,000
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Old tax regime
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One-third of family pension, capped at ₹15,000
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Example: If annual family pension is ₹1,20,000, one-third is ₹40,000. Subject to eligibility and the applicable law, the deduction may be restricted to ₹25,000 under the new regime or ₹15,000 under the old regime.
When is gratuity tax-free?
Gratuity tax treatment depends on the employee category. Qualifying gratuity received by government employees may be fully exempt. For eligible non-government employees, the exemption is generally the least of the actual gratuity received, the amount calculated under the applicable statutory formula and the notified ceiling of ₹20 lakh. The formula is not identical in every case.
Employees covered by the Payment of Gratuity Act generally use 15 days’ salary for each completed year of service or part exceeding six months, based on the prescribed salary definition and divisor. Other employees use the separate income tax formula. Excess over the permitted exemption is taxable.
How is leave encashment taxed at retirement?
Leave encashment received at retirement by Central or State Government employees is generally fully exempt. For other employees, the exemption is normally the least of four values: actual leave encashment received, cash equivalent of eligible unutilised leave, 10 months’ average salary, and the notified ceiling of ₹25 lakh. This is an important correction to the live article, which states ₹3 lakh.
The Central Government increased the notified ceiling to ₹25 lakh for qualifying non-government employees with effect from 1 April 2023. The ceiling is not an automatic exemption: the least calculation still applies, and earlier exemptions can reduce the lifetime limit.
Is an EPF withdrawal taxable after retirement?
A withdrawal from a recognised provident fund is generally exempt when the qualifying continuous service conditions are met. Five years of continuous service is a common threshold, and eligible service with a previous employer may count when the balance is transferred. Certain interruptions outside the employee’s control can also receive specific treatment. A premature withdrawal may be taxable and may attract tax deduction at source, depending on the facts and the amount.
Do not state that every EPF withdrawal at retirement is automatically exempt. Check the service record, transfer history, withdrawal reason, and official EPFO tax guidance.
Are PPF maturity proceeds taxable?
Qualifying Public Provident Fund withdrawals and maturity proceeds are generally exempt under the scheme and income-tax rules. Keep the account statement and closure or withdrawal record. This treatment should not be confused with recognised EPF, which is employment-linked and has separate continuous service rules.
How are NPS withdrawals and annuity income taxed?
NPS tax treatment has separate stages. On an eligible exit, lumpsum withdrawal up to 60% of the accumulated corpus may qualify for exemption. A portion may be used to purchase an annuity under the applicable exit rules. The annuity purchase and the later annuity payouts should not be treated as the same receipt. Regular annuity payments received later are generally taxable in the recipient’s hands in the year of receipt.
The exact result can depend on subscriber category, exit route, and payout structure. Preserve the NPS exit statement, annuity contract, and annual payout statement.
How are approved superannuation fund receipts taxed?
An approved superannuation fund can pay benefits in different forms, and the tax outcome depends on the event and conditions. Qualifying payments on retirement, incapacity, or death may receive exemption under the applicable provision, while pension or annuity income can be taxable when received. Review the trust statement and employer certificate rather than assuming the full balance is exempt.
Do senior citizen status and the tax regime change the answer?
Senior citizen status does not create a blanket retirement benefit exemption. Under the old regime, resident seniors, and super senior citizens have age-based basic exemption limits. Under the new regime, age-specific basic exemption limits do not apply. For AY 2026-27, the new regime’s section 87A framework must be checked using total income and the rules for special-rate income and marginal relief.
A resident individual aged 60 or above who does not have income from business or profession is generally not liable to pay advance tax under section 207. This does not remove the final tax liability. Any balance can still be payable as self-assessment tax before filing the return.
Are retirement benefits received by an NRI taxable in India?
The answer depends on residential status, where the income arises or is received, the nature of the benefit, and the relevant Double Taxation Avoidance Agreement. A non-resident can still have Indian-source pension or retirement income taxable in India. Conversely, treaty relief or foreign tax credit may prevent double taxation, subject to the law, evidence, and filing requirements.
Cross-border cases should distinguish government service pension, private employment pension, social security benefits, and annuity payments. Review the treaty article, tax-residency certificate, foreign tax proof, and Form 67 requirements where applicable.
What records should you keep before filing?
- Pension payment order, Form 16, bank pension certificate, AIS, and Form 26AS.
- Gratuity computation, coverage status, last-drawn salary evidence, and employer certificate.
- Leave balance, average-salary working, encashment statement, and details of earlier exemptions.
- EPF service history, transfer records, and withdrawal statement.
- NPS exit statement, annuity purchase record, and payout certificate.
- Tax-residency and foreign-tax documents for an overseas pension.
- A working paper that separates exempt amounts, taxable amounts, and deductions.
How can ABSLI support retirement income planning?
ABSLI offers retirement and annuity solutions. Suitability depends on age, cash-flow needs, liquidity, life expectancy assumptions, nominee arrangements, and policy terms. This tax guide does not recommend a product. Review the current benefit illustration, sales prospectus, policy document, product classification, and verified UIN before making a decision.
September 18, 2026
7 mins read
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