Income Tax Bill 2025 grants full tax exemption on commuted pension to all; what it means for retirees
Previously, the benefit of a full tax exemption on commuted pension was primarily available to salaried employees under specific provisions of the Income-tax Act, 1961.
- Aug 12, 2025,
- Updated Aug 12, 2025 6:35 PM IST
The revised Income Tax Bill, 2025, passed by the Lok Sabha this week, has expanded tax relief on commuted pension payouts, granting a full deduction to all taxpayers who receive such payments from approved pension funds, regardless of their employment status.
Previously, the benefit of a full tax exemption on commuted pension was primarily available to salaried employees under specific provisions of the Income-Tax Act, 1961. Non-employees — such as self-employed individuals or independent investors — could only access this relief indirectly, creating uncertainty in its application.
What has changed?
Under the updated provisions, the entire amount of a commuted pension — a lump-sum payout in lieu of regular monthly pension — will be deductible from taxable income if it is received from a “specified fund” listed in Schedule VII of the Income Tax Bill, 2025. This includes well-known entities such as the LIC Pension Fund and other notified approved funds.
The revised Bill introduces Section 93(1)(g) to cover taxpayers who are not employees but have invested independently in approved pension schemes. This means that a self-employed professional or private sector worker without an employer-backed pension plan can now claim the same tax deduction as a retired government employee receiving a commuted pension.
Changes recommended
The expansion stems from recommendations made by the 31-member Select Committee, chaired by BJP MP Baijayant Panda. During its review of Clause 19 of the original Bill, the Committee identified what it termed a “critical gap” in equitable tax treatment.
While the original Clause 19 preserved exemptions for employees, it failed to extend relief to non-employees receiving commuted pension from approved funds — despite the current Income-tax Act already offering this parity under Section 10(10A)(iii) read with Section 10(23AAB).
To correct this, the Committee proposed explicitly allowing a deduction under the head “Income from Other Sources” for such taxpayers. This recommendation was accepted and incorporated into the final Bill.
New tax framework
CA Suresh Surana welcomed the change, noting that it preserves the equitable treatment long embedded in the tax framework.
“Under the current law, commuted pensions from approved funds are fully exempt regardless of employment status. The original Clause 19 of the Bill limited this exemption to employees only, excluding independent contributors and nominees. The Select Committee identified this as a disparity and recommended allowing a full deduction under ‘Income from Other Sources’ for non-employees receiving commuted pensions from approved pension funds. This has now been incorporated through Section 93(1)(g),” Surana explained.
He added that the term “non-employees” could extend to private sector workers whose employers do not operate a pension scheme, as well as individuals investing on their own in approved funds such as LIC Pension Fund.
Implications for taxpayers
The new provision ensures that retirees and investors who have chosen to build their retirement corpus independently will not be penalised in tax terms compared to their salaried counterparts. It also clarifies the position for nominees receiving such pensions after the death of the original investor.
Tax experts say the change not only resolves ambiguity but also encourages greater participation in approved pension schemes, as the tax treatment of lump-sum withdrawals is now clearly codified.
With the Bill now cleared by the Lok Sabha, the provisions will take effect once it receives the President’s assent, potentially applying to pension payouts as early as the financial year 2025–26.
The revised Income Tax Bill, 2025, passed by the Lok Sabha this week, has expanded tax relief on commuted pension payouts, granting a full deduction to all taxpayers who receive such payments from approved pension funds, regardless of their employment status.
Previously, the benefit of a full tax exemption on commuted pension was primarily available to salaried employees under specific provisions of the Income-Tax Act, 1961. Non-employees — such as self-employed individuals or independent investors — could only access this relief indirectly, creating uncertainty in its application.
What has changed?
Under the updated provisions, the entire amount of a commuted pension — a lump-sum payout in lieu of regular monthly pension — will be deductible from taxable income if it is received from a “specified fund” listed in Schedule VII of the Income Tax Bill, 2025. This includes well-known entities such as the LIC Pension Fund and other notified approved funds.
The revised Bill introduces Section 93(1)(g) to cover taxpayers who are not employees but have invested independently in approved pension schemes. This means that a self-employed professional or private sector worker without an employer-backed pension plan can now claim the same tax deduction as a retired government employee receiving a commuted pension.
Changes recommended
The expansion stems from recommendations made by the 31-member Select Committee, chaired by BJP MP Baijayant Panda. During its review of Clause 19 of the original Bill, the Committee identified what it termed a “critical gap” in equitable tax treatment.
While the original Clause 19 preserved exemptions for employees, it failed to extend relief to non-employees receiving commuted pension from approved funds — despite the current Income-tax Act already offering this parity under Section 10(10A)(iii) read with Section 10(23AAB).
To correct this, the Committee proposed explicitly allowing a deduction under the head “Income from Other Sources” for such taxpayers. This recommendation was accepted and incorporated into the final Bill.
New tax framework
CA Suresh Surana welcomed the change, noting that it preserves the equitable treatment long embedded in the tax framework.
“Under the current law, commuted pensions from approved funds are fully exempt regardless of employment status. The original Clause 19 of the Bill limited this exemption to employees only, excluding independent contributors and nominees. The Select Committee identified this as a disparity and recommended allowing a full deduction under ‘Income from Other Sources’ for non-employees receiving commuted pensions from approved pension funds. This has now been incorporated through Section 93(1)(g),” Surana explained.
He added that the term “non-employees” could extend to private sector workers whose employers do not operate a pension scheme, as well as individuals investing on their own in approved funds such as LIC Pension Fund.
Implications for taxpayers
The new provision ensures that retirees and investors who have chosen to build their retirement corpus independently will not be penalised in tax terms compared to their salaried counterparts. It also clarifies the position for nominees receiving such pensions after the death of the original investor.
Tax experts say the change not only resolves ambiguity but also encourages greater participation in approved pension schemes, as the tax treatment of lump-sum withdrawals is now clearly codified.
With the Bill now cleared by the Lok Sabha, the provisions will take effect once it receives the President’s assent, potentially applying to pension payouts as early as the financial year 2025–26.