Income Tax Bill 2025: Full Tax Exemption on Commuted Pension from Approved Pension Funds and EPFO
The Income Tax Bill 2025, passed in the Lok Sabha, brings major relief for pensioners — including EPFO pensioners — by granting full tax exemption on commuted pension received from approved pension funds such as LIC Pension Fund and pensions under the Employees’ Provident Fund Organisation (EPFO). This reform ends the disparity in pension taxation between employees and non-employees.
What Has Changed?
Earlier, tax exemption on commuted pension was available only to certain categories of employees, mainly in the government sector. Many individuals, including pensioners and private citizens who invested in recognised pension funds, did not get this benefit.
The new bill removes this difference and ensures equal tax relief for:
Government employees.
EPFO pensioners.
Private sector retirees and individuals with investments in approved pension funds.
What is Commuted Pension?
Commuted pension refers to taking a lump sum amount instead of receiving monthly pension instalments.
For example, if a pensioner chooses to take their next 10 years of pension from EPFO or LIC Pension Fund in one go, this is called commutation. This lump sum can then be used for major expenses or investments.
Who Will Be Eligible?
Under the new provision, the following will benefit:
Government employees, including defence personnel and public sector workers.
Pensioners receiving commuted pension under the Employees’ Pension Scheme.
Private sector employees without an employer-provided pension scheme but who invest in approved pension funds like LIC Pension Fund.
Non-employees who contribute to approved pension funds.
Why Was This Change Needed?
Previously, commuted pension received by employees was completely tax-free, but for EPFO pensioners and other non-employee pensioners, it was fully taxable under Income from Other Sources.
The Lok Sabha Select Committee recognised this inequality and recommended extending the same tax relief to all pensioners, ensuring equal treatment for EPFO pensioners, private sector retirees, and government employees alike.
When Will It Apply?
The provision will be effective from April 1, 2026, meaning the benefit will be available in the Income Tax Return for FY 2026–27.
Eligible Pension Schemes
The exemption will apply to:
Pension funds approved under Section 10(10A) of the Income Tax Act, 1961.
Funds under Section 10(23AAB) such as the LIC Pension Fund.
Other government-notified approved pension funds.
Side-by-side comparison table with a dedicated row for EPFO pensioners:
| Category | Old Rules (Before Income Tax Bill 2025) | New Rules (After Income Tax Bill 2025) |
|---|---|---|
| Government Employees | A commuted pension is fully exempt from tax. | Commuted pension fully exempt from tax (unchanged). |
| (Employees’ Pension Scheme) | A commuted pension is fully taxable under Income from Other Sources. | A commuted pension is fully exempt if received from EPFO/EPS (approved pension scheme). |
| Private Sector Employees (with approved pension funds) | Exemption available only for certain employee categories; many are fully taxed. | Full exemption if pension received from approved pension funds, such as LIC Pension Fund. |
| Non-Employees investing in approved pension funds | Fully taxable under Income from Other Sources. | Full exemption under the same provisions as employees. |
