Meaning of Commuted Pension:- When any lump-sum payment is made in lieu of periodical payment of pension then it will called as commuted pension.

Treatment of Commuted Pension from Income Tax Point of View:- The Pension is an income. As per Indian Income Tax Act, the receipt from pension is treated as under:-

  1. Any payment received as commuted pension by Government employees or Semi-Government employees under Civil Pension (Commutation) Rules or any other such rules, is fully exempt from income tax.
  2. Commuted pension received by other employees i.e. private sector employees, will be exempt subject to the following terms & conditions:-
  • In case any gratuity is received by any employee then the commuted value of one third of normal pension shall be exempt.
  • In case no gratuity received by the employee then the commuted value of half of normal pension shall be exempt.


Illustration: Mr. X is Central Government employee. He retired from his services on 31.12.17. His normal pension was fixed at Rs.22000/= per month.. He commutes Rs.15000/= of his pension and receives Rs.12,00,000/=. He also received gratuity for Rs.700000/=. Compute his taxable income during financial year 2017-18.

Solution: Since Mr. X is a Central Government employee therefore his income from commuted pension shall be totally exempt from income tax.

Illustration: Mr.Y was working with a private firm. He retired on 31.07.17. His pension was fixed for Rs.15000/= per month. He commutes Rs.12000/= and receives Rs.960000/=. Compute his exempted income for financial year 2017-18 from income tax if (a) he received Rs.500000/= as gratuity or (b) he did not receive any gratuity.


(a)   if Mr. Y received gratuity:-

Amount exempt = commuted value of 1/3rd of normal pension

960000           12000

=       ———    x     ——–    = 320000

12000                 3


(b)   If Mr. Y did not receive gratuity

Amount exempt = Commuted value of ½ of normal pension

960000          12000

=    ———    x    ——–  =  480000/=

12000               2