Taxability of Pension

YOUR CASE FALLS UNDER CASE III AND I THINK U R RIGHT.

Pension is a payment made by the employer after the retirement/ death of the employee as a reward for past services, following table gives a broad tax treatment of pension:-

I agree with G Aditya

Hello Saurabh : 

In case of income in the nature of family pension received by family of the employee in whose hand such amount is chargeable

Deduction is allowed to the extent of lower of (a) one-third of such income or (b) Rs. 15,000 (Rs. 12,000 up to the assessment year 1997-98).
For this purpose family pension means a regular monthly amount payable by the employer to a person belonging to the family of the employee in the event of his death.

So make it sure that the pension your assessee is getting is same as explained in the provision explained above.

as per the rules least of the following  two would be allowed as a deduction-:

1. 1/3rd of the pension amount

2. 15000

as per the present scenario 15000 is the  lower amount ,therefore 15000would be allowed as a deduction