"My Indian pension is tax-free now that I live abroad": What ITA 2025 actually says

"My Indian pension is tax-free now that I live abroad": What ITA 2025 actually says

A retired bank manager in Toronto told his children last month that his LIC-paid pension from his old Indian employer had become "foreign income" the day he got his Canadian PR, and therefore India could no longer touch it. A former PSU engineer in Dubai believes the same about his monthly pension credited to his NRO account. Both are wrong, and both are at risk of a notice. The claim that an Indian employer's pension becomes tax-free simply because you now live abroad is one of the most persistent myths among retired NRIs — and ITA 2025 does nothing to rescue it.

What the law actually says

The taxability of any income in India turns on where it is sourced, not where you happen to live when you receive it. Pension paid for services you rendered in India is Indian-source income, full stop.

Under the Income Tax Act, 1961, Section 9(1)(ii) deemed any salary — and pension is taxed under the head "Salaries" — to accrue in India if it was earned for services rendered in India. The Income Tax Act, 2025 carries this forward without dilution: income from employment is deemed to be sourced in India where the underlying service was rendered here, regardless of the place of receipt or the residential status of the recipient. The residency test of Section 6 (identical in both the ITA 1961 and ITA 2025) decides how much of your global income India taxes — but it never switches off tax on income that is Indian-source to begin with.

So the residency status that makes you an NRI does exactly one thing for your pension: it limits India's reach to your Indian-source income. Your Indian employer's pension is squarely inside that net.

Two distinctions decide the actual tax:

Government versus non-government pension. A pension paid by the Central or State Government for past government service is taxable in India for an NRI. A pension paid by a private employer, a PSU, a bank, or through an annuity bought by your employer (LIC, etc.) is also taxable in India — there is no NRI carve-out for either.

Commuted versus uncommuted pension. Your regular monthly pension (uncommuted) is fully taxable as salary. A lump-sum commutation is treated differently: for government employees the commuted portion is fully exempt, and for non-government employees it is partially exempt under the commutation rules retained in ITA 2025. The monthly stream — which is what most retirees actually live on — is taxed in full.

The only route that can genuinely reduce or eliminate India's tax is a Double Taxation Avoidance Agreement (DTAA), and that is a treaty claim you must actively invoke — not an automatic consequence of moving abroad.

Practical implications for NRIs

Consider a concrete case, because the numbers are where the myth falls apart.

Case study — Mr. Suresh Menon, retired PSU bank manager, now in Toronto. Suresh draws ₹65,000 per month (₹7.8 lakh per year) as an uncommuted pension from his former employer, credited to his NRO account. He assumed that as a Canadian resident, this was no longer taxable in India.

Reality under ITA 2025: the ₹7.8 lakh is Indian-source salary income. Against it Suresh can claim the standard deduction of ₹75,000 available under the new regime, bringing taxable pension to ₹7.05 lakh. Under the ITA 2025 slab structure, income up to ₹4 lakh is nil, and the next slab is taxed at modest rates — but here is the catch most NRIs miss: the ₹12 lakh rebate (Section 87A relief) is NOT available to non-residents. That rebate is reserved for resident individuals. So Suresh, as an NRI, actually pays tax on his pension even though a resident with the same income might pay nothing.

His bank, paying the pension, is required to deduct TDS. Without a DTAA claim on file, TDS runs at slab rates on the full pension. Suresh will see a real deduction every month — not a theoretical one.

Now the DTAA layer. Under the India–Canada DTAA, pensions in respect of past private/PSU employment are generally taxable only in the country of residence (the standard "Pensions" article in most Indian treaties assigns taxing rights to the residence state for non-government pensions). If Suresh validly invokes the treaty, Canada taxes the pension and India steps back — but only government-service pensions stay taxable in India under the separate "Government Service" article. Suresh's PSU pension is non-government, so the treaty can shift it to Canada. None of this happens automatically: he must file the paperwork below before the bank will stop deducting Indian TDS.

A second NRI, Mrs. Kavita Rao in Dubai, draws a Central Government pension. For her the answer flips: the Government Service article in the India–UAE DTAA keeps government pensions taxable in India, and the UAE has no personal income tax anyway. Her pension is taxable in India regardless of the treaty. The myth — "I live in a no-tax country, so it's free" — costs her nothing in tax planning only because she would owe India either way; but believing she owes nothing would leave her with an unfiled return and a notice.

A third pattern catches NRIs in the United States. Take Mr. Anand Iyer in New Jersey, drawing a private company pension of ₹50,000 a month from India. Under the India–US DTAA, private pensions are taxable only in the country of residence — so the US taxes this pension and India should not, provided Anand files his TRC and Form 10F so his Indian bank applies nil TDS. But Anand must still report the income on his US return, and if his Indian bank deducted TDS before his paperwork was processed, he files ITR-2 in India to claim that money back as a refund. The DTAA does not erase the filing; it changes which country keeps the tax.

Watch the type of retirement payout too. A commuted lump sum, gratuity, leave encashment, and an annuity bought under the National Pension System (NPS) each have their own exemption rules under ITA 2025, distinct from the ordinary monthly pension. NRIs frequently treat all "retirement money from India" as one bucket; the Act does not. Classify each payout separately before assuming any of it is exempt.

The thresholds that matter: if your total Indian income, including pension, exceeds the basic exemption limit, you must file an Indian return as an NRI — typically ITR-2. Bank TDS is not the end of the story; it is an advance, and filing reconciles it.

Step-by-step: what to do

• Classify your pension first. Determine whether it is (a) government or non-government, and (b) commuted or uncommuted. This single classification decides both the Indian tax and which DTAA article applies.
• Get a PAN and keep it operative. Pension TDS and any DTAA claim are impossible without an active PAN. If your PAN is inoperative, the bank will deduct TDS at the higher 20% rate.
• Obtain a Tax Residency Certificate (TRC) from your country of residence (Canada, UAE, US, UK, etc.) for the relevant Tax Year. ITA 2025 uses "Tax Year" — the period April to March — in place of the old "Previous Year / Assessment Year" language. The TRC is mandatory to claim any treaty benefit.
• File Form 10F online on the income tax e-filing portal. Email submission is no longer accepted — Form 10F must be filed electronically and linked to your PAN. It supplements the TRC with the specific details India requires.
• Submit TRC + Form 10F to your pension-paying bank before the financial year's TDS cycle, so the bank applies the DTAA rate (often nil for non-government pension under a residence-taxes treaty) instead of full slab TDS.
• Reconcile your TDS using Form 26AS (now Form 168 under ITA 2025). Form 168 is the consolidated tax statement showing every rupee of TDS deducted against your PAN. Match the bank's deduction here before filing.
• File ITR-2 in India for the Tax Year, reporting the pension, claiming the standard deduction of ₹75,000, applying any DTAA relief, and claiming a refund if TDS exceeded your actual liability.
• Claim foreign tax credit at the other end. If both countries tax the pension (e.g., a government pension taxed in India while you live in the US), claim the foreign tax credit in your residence-country return so you are not taxed twice on the same rupee.

FAQ

Q: I'm a Canadian/US/UK resident now. Is my old Indian company pension automatically tax-free in India?
No. It is Indian-source income and taxable in India by default. It only becomes non-taxable in India if you actively invoke a DTAA that assigns taxing rights to your residence country — and that requires a TRC plus Form 10F. Government-service pensions stay taxable in India even with a treaty.

Q: My pension goes straight into my NRO account. Does that change anything?
No. Place of receipt does not determine taxability for pension; the place of service does. Crediting it to an NRO (or even a foreign) account does not make Indian-source pension tax-free. The bank will still deduct TDS.

Q: I live in the UAE with zero income tax. So I pay nothing anywhere, right?
You pay nothing in the UAE because it levies no personal income tax, but India still taxes your Indian-source pension. For a non-government pension the India–UAE DTAA can shift taxing rights to the UAE (where the rate is nil), but a government pension remains taxable in India regardless. You must still file an Indian return.

Q: Do I get the ₹12 lakh tax-free benefit everyone is talking about under ITA 2025?
No. The Section 87A rebate that makes income up to ₹12 lakh effectively tax-free is available only to resident individuals. As an NRI you get the ₹75,000 standard deduction and the slab rates, but not that rebate — so your Indian pension can be taxable at a level where a resident would pay nothing.

Closing

Your Indian pension does not stop being Indian just because you moved. What changes is the toolkit available to you — the standard deduction, the slab structure, and above all the DTAA — and every one of those requires correct paperwork filed in the right order. Getting the government-versus-private classification or the Form 10F timing wrong is the difference between a clean nil-TDS pension and a year-end notice. For your specific situation, book a consultation at harunraaj.com.

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