Sec 10(10a)

Payment in commutation of pension [Section 10(10A)] :

A pension is of two types:

• commuted - Received Lump sum amount  by summing up the whole or part of the pension; and
• uncommuted - received periodically in small amounts.

Its treatment is discussed below:

(a) Employees of the Central Government/ local authorities/ Statutory Corporation/ members of the Defence Services: Any commuted pension received is fully exempt from tax.

(b) Non-Government Employee: Any commuted pension received is exempt from tax in the following manner:

• If the employee is in receipt of gratuity:
  • Exemption = [ 1/3 * commuted pension received / commutation % * 100% ]
• If the employee does not receive any gratuity
  • Exemption = [ 1/2 * commuted pension received / commutation % * 100% ]

I hope I did explain it in a easy way.