Family Pension Deduction for AY 2025-26: Eligibility and Limits Explained

The death of a salaried employee often leaves dependents financially vulnerable. To reduce the impact, employers provide a family pension, which ensures that the family continues to receive income support.

From a taxation perspective, a family pension is not treated as salary but as "Income from Other Sources." This classification affects how it is taxed and what deductions are available.

For Assessment Year (AY) 2025-26, the family pension deduction remains an important tax relief mechanism for recipients. Knowing how it works helps families optimise tax liability and secure their financial well-being.

What is Family Pension?

Family pension is a regular payment from the employer to the dependents of a deceased employee. It is not the same as a retirement pension, which is received directly by the retired employee. Instead, it ensures continued income support for the family.

• Paid monthly to the spouse, dependent children, or other eligible dependents
• Taxable in the hands of the recipient, not the employer
• Covered under the category of "Income from Other Sources" for tax purposes

The purpose of a family pension is stability for dependents, but tax rules limit how much of it can be shielded from taxation.

Family Pension Deduction under Income Tax Rules

Under Section 57(iia) of the Income Tax Act, family pension recipients can claim a deduction. The deduction is calculated as the lower of:

• One-third of the pension received, or
• ₹15,000

This is referred to as the family pension standard deduction. Unlike the standard deduction for salaried employees, it is exclusive to the pension received by family members of a deceased employee.

Eligibility for Family Pension Deduction

The family pension deduction is available only to specific categories of dependents, and its application is uniform across taxpayers. Knowing exactly who qualifies and under what conditions prevents errors while filing returns.

Who Qualifies?

• Surviving Spouse of the Employee
  The most common recipient of a family pension is the surviving husband or wife of the deceased employee. The law recognises the spouse as the primary dependent and grants them the right to claim the deduction.
• Dependent Children
  Minor children or unmarried daughters may receive a family pension if there is no surviving spouse or if the pension order allows it. In these cases, the child becomes the rightful claimant of the deduction. For example, if a government employee passes away, leaving behind two minor children, the pension may be divided equally, and each child’s guardian can claim the deduction proportionally on their behalf.
• Dependent Parents
  In some cases, if the employee dies unmarried or without a spouse or children, dependent parents may be entitled to receive a family pension. Though less common, they too are eligible to claim the deduction, provided the pension originates from the employer of the deceased.

Conditions to Claim

• Pension Must Originate from the Employer
  Only pensions disbursed by the employer (through a treasury, pension fund, or bank) qualify. Any private support received from relatives or voluntary payments does not count as a family pension and cannot attract the deduction.
• Taxable Only in the Recipient’s Hands
  The pension is taxed in the hands of the person who receives it. If the spouse receives the pension, it is included in their income, not clubbed with the deceased employee’s last return. This ensures clarity of taxation and prevents double-counting.
• No Other Deductions Allowed
  The Income Tax Act provides only the specific deduction under Section 57(iia). Recipients cannot claim additional expenses such as bank charges, travel costs, or incidental expenses against the family pension. The idea is to apply one uniform deduction limit for all taxpayers.

How Deduction on Family Pension is Calculated

The method of calculation is straightforward.

1. Add up the total family pension received during the financial year
2. Calculate one-third of the pension amount
3. Compare with ₹15,000 and claim the lower figure as deduction
4. Add the balance pension to other income heads to determine total taxable income

Many taxpayers simplify this process by using a family pension calculator, which provides quick and accurate results.

Examples of Family Pension Deduction for AY 2025-26

Example 1: Larger pension amount

• Annual family pension: ₹90,000
• One-third: ₹30,000
• Deduction: ₹15,000 (lower of the two)
• Taxable pension: ₹75,000

Example 2: Smaller pension amount

• Annual family pension: ₹24,000
• One-third: ₹8,000
• Deduction: ₹8,000 (lower of the two)
• Taxable pension: ₹16,000

Example 3: Pension with other income

• Annual family pension: ₹1,20,000
• One-third: ₹40,000
• Deduction: ₹15,000
• Taxable pension: ₹1,05,000
• Other income: ₹5,00,000
• Gross taxable income: ₹6,05,000

These examples show how the deduction provides limited relief but ensures consistent treatment.

Family Pension Deduction Section in the Law

The relief flows directly from Section 57(iia) of the Income Tax Act. Unlike retirement pensions, which may be commuted or uncommuted, family pension has no option for commutation. The law is clear: dependents receive recurring payments and can claim only the fixed deduction.

This classification prevents misuse of tax exemptions while providing moderate relief to genuine dependents.

Difference Between Pension and Family Pension

This distinction ensures that taxation aligns with the nature of income.

Effect on Tax Liability

The family pension deduction provides relief, but it does not exempt the entire pension amount.

Once the deduction is applied, the balance of the pension must be included under “Income from Other Sources” and taxed according to the recipient’s slab rate. The impact of this inclusion varies significantly depending on the overall income profile of the dependent.

Impact on Low-Income Recipients

For individuals with modest income, the deduction often shields a large proportion of their pension. In cases where the family pension is small, the lower of one-third or ₹15,000 can offset most of it. This can keep the taxable portion minimal or, in some cases, reduce it to an amount that still falls within the basic exemption limit.

Example:

• Annual family pension: ₹36,000
• One-third: ₹12,000
• Deduction: ₹12,000
• Taxable pension: ₹24,000

If the recipient has no other income, the total taxable income of ₹24,000 is well below the basic exemption threshold. In effect, the pension becomes fully tax-free for that year.

Impact on Higher-Income Recipients

For dependents who already have other sources of income, such as rent, business income, or investments, the deduction appears modest in comparison. Even though ₹15,000 provides some relief, the remaining pension can push their total income into a higher tax slab.

Example:

• Annual family pension: ₹1,20,000
• One-third: ₹40,000
• Deduction: ₹15,000 (since it is the lower figure)
• Taxable pension: ₹1,05,000
• Other income: ₹12,00,000
• Total taxable income: ₹13,05,000

In this case, the deduction only reduces taxable income by ₹15,000. The overall liability remains largely unchanged because the recipient already falls in the 30 percent tax slab.

Why Tax Planning Becomes Essential

The varying impact of the family pension deduction highlights the importance of broader tax planning. Recipients cannot rely solely on this provision for relief. Combining family pension with other deductions under Chapter VI-A, such as Section 80C or Section 80D, ensures that the overall liability is managed better.

For families dependent on a pension, linking this income with tools like a structured retirement plan provides more predictable outcomes. Pension provides a steady flow, but proactive planning ensures that taxation does not erode its value.

Tax Planning with Family Pension

Effective planning ensures that family pension does not push recipients into an avoidable tax burden. Beneficiaries should combine this income with broader financial planning strategies.

A structured retirement plan can help dependents align pension income with long-term goals. Pension income alone may not suffice, so supplementary coverage through insurance and investments is essential.

Family Pension in Relation to Retirement Planning

Family pension is designed for dependents, but does not cover all expenses. The amount may remain fixed while living costs rise. To address this, families should calculate future requirements.

Using a retirement planning calculator provides insights into income gaps. It helps families estimate how much additional savings or insurance is needed to sustain financial stability.

The Role of Life Insurance for Families

While family pension provides steady support, it rarely matches the income of the deceased employee. A life insurance cover becomes crucial to fill the shortfall. It offers a lump sum that can cover immediate expenses, debt repayments, and future financial goals like education or healthcare.

Combining family pension with life insurance benefits allows families to build a reliable stream of income while ensuring access to lump-sum support when needed.

Compliance and Documentation

To claim the deduction smoothly, dependents should maintain proper documentation.

• Pension receipts or monthly credit proofs
• Bank account statements reflecting pension credits
• Correct classification under "Income from Other Sources" in ITR
• Accurate deduction claim of the lower of one-third or ₹15,000

Failure to follow these steps may invite scrutiny or disallowance of claims.

Common Mistakes in Claiming Family Pension Deduction

• Treating family pension as salary income
• Claiming both the salary standard deduction and family pension deduction
• Forgetting to include pension income in the total taxable income
• Not maintaining records of pension receipts

Avoiding these mistakes ensures compliance and prevents disputes during assessment.

Broader Impact of Family Pension Deduction

Although the deduction is capped, it has significant importance for low and middle-income families. For some dependents, even ₹15,000 of tax relief can ease annual burdens. The provision also reflects the government’s attempt to balance revenue needs with compassion for families of deceased employees.

Key Takeaways

• Family pension is taxable under "Income from Other Sources”
• Deduction is limited to the lower of one-third of the pension or ₹15,000
• Applies only to dependents of deceased employees
• Governed by Section 57(iia) of the Income Tax Act
• Careful planning with retirement tools and insurance can optimise financial outcomes

Final Thoughts

The family pension deduction for AY 2025-26 remains a modest but meaningful relief for families. While it cannot eliminate tax liability, it ensures that dependents are not taxed on the entire pension amount. For families managing expenses after the loss of a breadwinner, this deduction provides some comfort.

The real strength, however, comes from combining a family pension with proactive financial planning. Insurance, retirement savings, and careful use of tax deductions together create a secure framework for long-term stability.

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