Income Tax Bill 2025: From UPS benefits to commuted pension rules — top 5 things every pensioner must know

The Lok Sabha passed the revised Income Tax (No. 2) Bill, 2025 on Monday, August 11, a move towards replacing the six-decade-old Income Tax Act of 1961. Introduced by Finance Minister Nirmala Sitharaman in the Parliament, the bill aims to streamline and modernise the country’s tax framework. It will now move to the Rajya Sabha and, upon securing Presidential assent, become law.

Out of the several provisions mentioned under the proposed bill, some key measures are specifically aimed at pensioners. Here are the top 5 takeaways for pensioners —

Unified Pension Scheme benefits

The revised bill incorporates the tax relief for Unified Pension Scheme (UPS) subscribers. As per the bill, a subscriber to the Unified Pension Scheme under the National Pension System (NPS) will receive a tax-free amount up to 60% of the total pension corpus at retirement, whether due to superannuation (regular retirement), voluntary retirement, or certain types of early retirement.

This tax-free benefit applies only if the retirement payout follows the conditions set out in a government notification issued on January 24, 2025.

Notably, these tax benefits are already available to NPS subscribers.

Retirement benefit account

The bill proposes a tax benefit for “retirement benefit accounts”, where the income from such accounts maintained in a notified country will be exempt from taxes.

Exemption on commuted pensions

Under the revised Income Tax Bill, 2025, the entire amount of a commuted pension is now eligible for a full tax deduction. Previously, only salaried employees could avail of a complete tax exemption on commuted pensions. But now, everyone who has invested in an approved pension scheme will receive tax relief.

Pension scheme withdrawals

The proposed law clarifies the tax applicability for partial withdrawals from pension schemes before maturity, which seeks to provide clarity and minimise disputes over the taxation rules regarding early withdrawals.

Family pension

The bill maintains the same deduction for family pensions, where either one-third of the pension or ₹15,000, whichever is lower, is deducted from taxable income.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Taxpayers are advised to consult a qualified tax professional or refer to the official website of the Income Tax Department for accurate and up-to-date guidance before filing their returns.