Income Tax Exemption under Section 10(23AAB) for Pension Funds
Section 10(23AAB) of the Income-tax Act, 1961 provides an exemption for qualifying income of certain pension funds established by the Life Insurance Corporation of India (LIC) or another insurer. The exemption applies to the fund's income, subject to the statutory conditions; it does not automatically exempt pension payments received by an individual.
Meaning and scope of Section 10(23AAB)
The provision covers income received by a person on behalf of a fund set up by LIC or any other insurer under a pension scheme to which contributions are made by individuals for the purpose of receiving a pension from that fund. The scheme must be approved by the competent insurance regulatory authority specified in the law.
| Eligible entity | A qualifying pension fund established by LIC or another insurer; income may be received by a person on the fund's behalf. |
|---|---|
| Qualifying income | Income received on behalf of the eligible fund, within the scope of Section 10(23AAB). |
| Extent of exemption | The entire qualifying income is excluded from total income, provided all statutory conditions are fulfilled. |
| Establishment date | The fund must have been set up on or after 1 August 1996. |
| Regulatory condition | The relevant pension scheme must have the approval required under Section 10(23AAB). |
Conditions for claiming the exemption
- Fund established by an insurer: The fund must be set up by LIC or another insurer on or after 1 August 1996.
- Pension purpose: It must operate under a pension scheme in which individuals contribute to receive a pension from the fund.
- Approval: The pension scheme must be approved by the Controller of Insurance or the relevant authority established under the Insurance Regulatory and Development Authority Act, 1999, as contemplated by the provision.
- Income received on behalf of the fund: The exemption applies to income falling within the statutory description and not to unrelated receipts of the insurer.
Fund exemption versus tax on pension recipients
The exemption is designed for the qualifying pension fund itself. Contributions made by individuals, deductions available to contributors, pension annuity receipts, and withdrawals are governed by their own provisions. Whether an individual is entitled to a deduction or must pay tax on a pension depends on the product and the law applicable to that person and tax year.
In particular, the exemption should not be confused with deductions for eligible pension contributions under provisions such as Section 80CCC of the 1961 Act, which are subject to separate conditions and limits.
Practical documentation and compliance
An insurer or fund administrator should retain the scheme's establishment documents, regulatory approval, pension scheme terms, contribution records, financial statements and records showing which income belongs to the fund. The exemption should be assessed separately for the relevant tax period and supported by the applicable statutory text and approval.
Official legal references
For authoritative information, consult the Income-tax Act published by the Income Tax Department, the India Code legislative database, and the Insurance Regulatory and Development Authority of India (IRDAI) for insurance regulatory information.
Legal applicability note (October 2026): This article explains the historical Section 10(23AAB) reference under the Income-tax Act, 1961. The Income-tax Act, 2025 applies from 1 April 2026; for tax years governed by that Act, verify the corresponding current provision and any transitional rules rather than relying solely on the former section numbering.
Frequently asked questions
Is all income of a pension fund tax-exempt?
No. The fund must satisfy the precise conditions in the applicable provision. A fund is not exempt merely because it offers pension products.
Does Section 10(23AAB) make an individual's pension tax-free?
No. It concerns income received on behalf of an eligible pension fund. Pension income received by individuals is considered separately under the applicable tax rules.
Is approval of the pension scheme necessary?
Yes. The scheme must have the regulatory approval required by the statutory provision.