Income Tax Bill 2025 Pension Changes: Planning for retirement is a big part of ensuring a stress-free future. But just when you think you’ve got it all figured out, tax laws change—and that can affect your pension income. Recently, the Lok Sabha passed the Income-Tax (No. 2) Bill, 2025, a major update designed to replace the old Income-Tax Act of 1961.
Championed by Finance Minister Nirmala Sitharaman, this bill focuses on simplifying the tax system, reducing disputes, and modernizing compliance. But for pensioners and subscribers of schemes like NPS (National Pension System) and UPS (Unified Pension Scheme), the new rules bring important benefits and clarity.
Let’s break it down in simple terms so you know exactly how your pension is affected.
Full Tax Exemption on Commuted Pensions – A Huge Relief
One of the biggest changes is complete income-tax exemption on commuted pensions.
Earlier, there was a difference between government employees and non-government employees—government staff enjoyed bigger tax benefits, while others had partial exemptions. This created an unfair gap.
Now, the disparity is gone. Anyone receiving a commuted pension from an approved superannuation fund or any other approved scheme will get full exemption from income tax.
Why it matters:
Your lump-sum pension withdrawal will be tax-free.
It ensures equality for all retirees, regardless of where they worked.
Good News for NPS and UPS Subscribers
The bill also addresses pension tax rules for subscribers of both NPS and UPS.
Unified Pension Scheme (UPS)
The law clearly states that the commuted portion of the pension under UPS will be fully exempt from tax. This puts it on the same footing as other approved pension funds.
National Pension System (NPS)
If you’re an NPS subscriber, you can still withdraw up to 60% of your corpus tax-free when closing your account or opting out. The new bill reconfirms this benefit, meaning your existing advantage remains untouched.
Bottom line: The government is making sure all major pension schemes have uniform tax treatment, which means more predictability and fairness for retirees.