Monthly pension received under the Employees' Pension Scheme (EPS) is generally taxable as "Income from Salary."
While the Provident Fund (PF) balance itself is often tax-exempt upon withdrawal (provided certain conditions regarding service tenure are met), the monthly pension payments that follow are treated differently.
Key Points on Taxability
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Tax Head: Pension income is classified as "Income from Salary" and is subject to income tax according to your applicable tax slab.
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Standard Deduction: Since pension income is taxed under the head of "Salary," you are eligible to claim the standard deduction (currently ₹50,000 for FY 2024-25 and later) from your pension income.
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Monthly Pension vs. Lump Sum: The monthly pension you receive (uncommuted pension) is fully taxable. If you were to "commute" your pension (receiving a lump sum portion in advance), specific tax exemptions under Section 10(10A) of the Income Tax Act may apply, depending on whether you are a government or non-government employee and whether you also receive gratuity.
Important Distinction
It is a common misunderstanding that because the pension is funded by contributions made during your service, the resulting pension payments should be tax-free. However, under Indian tax law, the monthly pension is considered a periodic payment and is treated as taxable income, regardless of the fact that it is derived from your (or your employer's) previous contributions.
Summary: Monthly pension received from the EPFO is fully taxable as "Salary" income according to your applicable tax slab, though you can claim a standard deduction against it.