Pension is an employee’s retirement benefit in the form of monthly income. If this income is passed on dependent family members after an employee’s death, it is called a family pension.

Family Pensions to Dependent Nominees Family pension payments are taxed under the head "Income From Other Sources" in their Income Tax filings. Family pension exemptions on uncommuted pensions are set to a maximum of ₹15,000 or a third of the pension received - whichever is lower. The primary benefit from receiving a family pension payment that is commuted is you get lump sum amounts. You can use them based on your needs while claiming tax benefits. When filing their tax returns, family members receiving pension payments must report them under the ‘Any other income earned’ in the sources scheduled in Income Tax Return 2 (ITR 2). Here’s an example: Your nominee gets a pension of ₹80,000 with a maximum exemption of ₹15,000. Thus the taxable amount is ₹80,000 - ₹15,000, which is ₹65,000.

There are two types of pensions:

  • Commuted Pension: Payment of the pension as a lump sum amount
  • Uncommuted Pension: Pension income is paid monthly

Generally, employers and taxpayers contribute to a pension fund during the period of service. After retirement, the pension is paid out of the fund. The family members considered as dependent ones include spouses, children younger than 25 years old, unmarried or divorced daughters until marriage, and dependent parents in some cases till death. There are some unique inclusions in the definition of dependent family members too after amendments to the law.
If deceased government employees legally separated from their spouses but have children, the spouses can get family pension payments. This is only if the children are denied eligibility for receiving these payments. Disabled children enjoy some provisions for getting family pension payments. They receive the payments through legal guardians. Provisions are also given to children born after the death of their biological parents or from void marriages.

Differences of Tax Liability Between Uncommuted and Commuted
Uncommuted pensions or periodical family pension payments are fully taxable as they fall under their income. Family pension exemptions apply to commuted pensions or lump-sums for certain cases. Employees of the government, a United Nations Organization, and Army Forces enjoy tax-exempted commuted pensions while non-government employees are partially exempted. If you get a gratuity with the monthly pension, a third of the amount is tax-exempted while the remaining is part of taxable income. If it only the monthly pension, then half the amount is tax-exempted. In both cases, it should be 100% of the pension being commuted.