Income Tax Bill 2025: Major Tax Relief for Pensioners, UPS and NPS Subscribers — Know What Changes for You
The Income Tax Bill 2025 has brought significant relief for pensioners, as well as subscribers of the Unified Pension Scheme (UPS) and the National Pension System (NPS). Passed in the Lok Sabha on Monday, August 11, this bill marks a major step towards replacing the nearly six-decade-old Income-Tax Act, 1961. Introduced by Finance Minister Nirmala Sitharaman, the bill incorporates most of the 285 recommendations made by the Parliamentary Select Committee.
The government had earlier withdrawn the initial version of the bill presented earlier this year. Now, the revised bill will move to the Rajya Sabha for approval. Its primary objectives are to simplify tax laws, reduce disputes, modernise processes, and make compliance easier. For retirees and pension scheme subscribers, the bill introduces several important tax benefits.
Complete Tax Exemption on Commuted Pension under UPS
One of the most notable changes is that the commuted portion of a pension under the Unified Pension Scheme (UPS) will now be entirely tax-free. Commuted pension refers to the lump sum amount that a retiree opts to receive in advance instead of part of their monthly pension.
If this lump sum is drawn from an approved superannuation fund or a recognised pension plan, it will now be fully exempt from income tax. This rule applies to both government and private sector employees, provided the pension scheme is officially recognised.
However, this exemption is limited to the lump sum received through commutation. The remaining monthly pension will still be taxed under the regular income tax rules. This reform is expected to help retirees save more on taxes and strengthen their post-retirement finances.
Different Rules for UPS and NPS Subscribers
While UPS subscribers enjoy complete tax exemption on the commuted portion of their pension, NPS subscribers will continue under the existing rules. Under the National Pension System, up to 60% of the total accumulated corpus can be withdrawn tax-free upon closure or exit from the scheme.
Introduction of the Retirement Benefit Account
The bill also introduces a Retirement Benefit Account—a special account managed by approved funds. Withdrawals from this account, upon meeting specified retirement conditions, will be entirely tax-free. This measure aims to encourage long-term retirement savings and ensure a stable income post-retirement.
Continued Relief for Family Pension
Existing tax benefits on family pension will remain unchanged. Under current provisions, one-third of the family pension or ₹15,000 (whichever is lower) is deductible from taxable income. This benefit applies to pensions received by the spouse or dependents of a deceased employee, offering much-needed financial support to families.
Clear Rules on Partial Withdrawals
The new bill clarifies the tax treatment of partial withdrawals made before retirement from pension schemes. This move will reduce ambiguity, minimise disputes, and improve transparency in how such withdrawals are taxed.
Objective Behind the Changes
According to the Finance Ministry, these updates aim to create uniform tax rules across different pension sources, make the law easier to interpret, and strengthen financial security for citizens after retirement.
Key Takeaway:
The Income Tax Bill 2025 is a game-changer for pensioners, UPS subscribers, and NPS investors. By introducing tax exemptions on commuted pensions under UPS, continuing family pension relief, and launching tax-free retirement benefit accounts, the government is focusing on boosting retirement savings and providing greater post-retirement stability. For those nearing retirement, these changes could translate into substantial tax savings and more financial freedom in their later years.
