Commutation of pension calculator for central government pensioners: lump sum, reduced pension and the break-even (2026)

When a central government employee retires, the pension office offers a choice: take part of the monthly pension as one lump sum now, and draw a smaller pension for the next 15 years. This is called commutation of pension. The rules that govern it are the Central Civil Services (Commutation of Pension) Rules, 1981, and the lump sum comes from a fixed table in those rules. This post works through the whole calculation for three basic pensions, using the table and the July 2026 Dearness Relief (DR) rate, and then asks the question that matters: when does commuting stop paying off?

Scope: this covers central civil pensioners under the CCS rules. Defence pensioners, state government pensioners (Rajasthan, Karnataka, Tamil Nadu, Telangana and others have their own rules and tables), bank and PSU pensioners, and NPS or UPS subscribers are out of scope.

How much you can commute

• The limit: Rule 5(1) lets a government servant commute up to forty percent of the pension for a lump sum. You can choose less.
• Fractions of a rupee: if the percentage you choose gives a figure with paise, the paise are ignored (Rule 5(3), as amended in 2010).
• Who cannot commute yet: under Rule 4, if departmental or judicial proceedings were started before retirement, or are started against a pensioner after retirement, commutation is not allowed while they are pending.

Source: Ministry of Personnel: CCS (Commutation of Pension) Rules, 1981, Rules 4, 5 and 6 (persmin.gov.in)

The formula

The commutation table, and which age to read

The table in force was put into the rules by the CCS (Commutation of Pension) Amendment Rules, 2010 (S.O. 2806, dated 9 November 2010, published in the Gazette of India on 13 November 2010). It is headed "Commutation Values For A Pension of Rs. 1 Per Annum, Effective from 1st January, 2006". The notification says this revised table applies to every commutation that becomes absolute from 2 September 2008. Pensioners whose commutation became absolute between 1 January 2006 and 1 September 2008 were paid on the older table for their original pension. These are the values around retirement age, exactly as printed:

Source: Gazette of India, Part II Sec. 3(ii), 13 Nov 2010: DoPPW Notification S.O. 2806, CCS (Commutation of Pension) Amendment Rules, 2010 (Rule 10A and the revised table)

Which row applies to someone retiring at 60? DoPPW answered this in an office memorandum of 25 October 2022. When an employee retires on attaining 60, commutation becomes absolute on the day after retirement (Rule 6(1)(i-a)), and the age next birthday is then 61. So the factor for 61, which is 8.194, applies. The same holds when the date of birth is the 1st of a month and the employee retires on the afternoon of the last day of the previous month.

Source: DoPPW OM No. 42/15/2022-P&PW(D)/2, 25 Oct 2022: commutation value for a government servant retiring at 60 is that of age 61 (age next birthday)

If you apply later, the date the commutation becomes absolute moves, and so can your age next birthday. For an application made after retirement in Form 1, it becomes absolute on the date the Head of Office receives the form. Cases that go through a medical examination become absolute when the medical authority signs its report. A higher age gives a smaller factor, so a late application usually means a smaller lump sum.

DR stays on the full pension

Commutation cuts your basic pension, but it does not cut your Dearness Relief. DoPPW clarified this in another OM of 25 October 2022: DR is payable on the original basic pension before commutation, or on that pre-commutation basic pension as revised by a Pay Commission, and not on the pension as reduced after deducting the commuted portion. So the monthly loss is exactly the commuted portion, nothing more.

Source: DoPPW OM No. 42/15/2022-P&PW(D)/1, 25 Oct 2022: Dearness Relief payable on original basic pension before commutation

The DR rate itself went from 60% to 63% of basic pension from 1 July 2026, after the Union Cabinet approved the increase on 28 October 2026. The worked examples below use 63%.

Source: PIB, Ministry of Finance, 28 Oct 2026: Cabinet approves DA to employees and DR to pensioners w.e.f. 01.07.2026 (60% to 63%)

Worked example: ₹25,000 basic pension, retiring at 60

• Commuted portion at 40%: ₹25,000 × 40% = ₹10,000 a month
• Factor at age next birthday 61: 8.194
• Lump sum: ₹10,000 × 8.194 × 12 = ₹81,940 × 12 = ₹9,83,280
• Basic pension left: ₹25,000 − ₹10,000 = ₹15,000
• DR at 63% on the full ₹25,000: ₹15,750
• Monthly pension after commuting: ₹15,000 + ₹15,750 = ₹30,750 (without commuting it would be ₹25,000 + ₹15,750 = ₹40,750)

All three pensions side by side

The arithmetic for the other two rows: ₹18,000 × 8.194 = ₹1,47,492, and × 12 = ₹17,69,904. ₹28,000 × 8.194 = ₹2,29,432, and × 12 = ₹27,53,184. DR is 63% of ₹45,000 = ₹28,350 and 63% of ₹70,000 = ₹44,100.

If the commutation becomes absolute a year or two later, the same 40% buys less. For the ₹25,000 pension, age next birthday 62 gives ₹10,000 × 8.093 × 12 = ₹9,71,160, and age 63 gives ₹10,000 × 7.982 × 12 = ₹9,57,840.

When the full pension comes back

The cut is not for life. Rule 10A, inserted by the same 2010 amendment, says the commuted amount of pension shall be restored on completion of fifteen years from the date the reduction becomes operative under Rule 6. If the commuted value was paid in more than one instalment because of an upward revision of pension, each instalment's commuted amount is restored fifteen years from its own date.

When does the reduction start? Under Rule 6, if your pension is paid through a nationalised bank, it starts on the date the bank credits the commuted value to your pension account. If it is paid by a treasury or Accounts Officer, it starts on the date you receive the commuted value or at the end of three months after the payment authority is issued, whichever is earlier. So if the bank credits your lump sum in December 2026, your full basic pension comes back in December 2041.

Fifteen years is the period the rules set today, so the break-even sums below use fifteen. If your pension office quotes a different restoration date, ask it which rule it relies on.

The break-even: when commuting stops paying off

Look at what you give up against what you get. For every ₹1 a month you commute at age 61, you get 8.194 × 12 = ₹98.33 now. Over the 15 years before restoration you give up ₹1 × 180 months = ₹180. That ratio is the same for every pension, so one set of numbers covers all three examples.

• Simple break-even, ignoring interest: 98.33 months, or about 8 years and 2 months. After that, the pension you have given up adds up to more than the lump sum. For the ₹25,000 pension: ₹10,000 × 180 = ₹18,00,000 given up over 15 years, against ₹9,83,280 received.
• With interest: suppose you put the lump sum in a deposit earning 8.2% a year, compounded monthly, and take out the commuted portion every month to make up the cut. The money runs out after about 163.6 months, or about 13 years and 8 months. That is roughly 16 months before restoration at 180 months.
• At 7% a year the deposit lasts about 146.5 months (about 12 years and 2 months), about 33–34 months short.
• The rate at which the lump sum would last exactly 180 months works out to about 9.05% a year (compounded monthly). Commuting is roughly the same as borrowing at that rate against your own pension.

Why 8.2%? It is the Senior Citizens Savings Scheme rate, a common home for a retiree's lump sum. The Ministry of Finance kept small savings rates for October to December 2026 unchanged from the July to September quarter, and the National Savings Institute lists SCSS at 8.20% from 1 April 2023 to 30 September 2026. So the rate for October to December 2026 is also 8.2%. SCSS pays its interest every quarter rather than letting you draw a fixed sum each month, so treat the 8.2% case as an illustration of the rate, not a model of the scheme. The figures are before tax on the deposit interest.

Source: Department of Posts SB Order No. 12/2026 (30 Sep 2026), enclosing DEA OM No. 1/4/2019-NS: small savings rates for 1 Oct to 31 Dec 2026 unchanged from Q2

Source: National Savings Institute: SCSS interest rate history (8.20%)

So what does that mean for the decision? On the numbers alone, the lump sum is a loan at about 9% that you repay out of your pension, and a safe deposit at 7–8% does not fully cover the cut. The implied rate is about 9% a year; compare it with the rate on whatever you would do with the money. If the pensioner dies before restoration, the rest of the cut is never repaid, and family pension is calculated on the full (uncommuted) pension, not the reduced one.

Tax on the lump sum and on the pension

From 1 April 2026 the Income-tax Act, 2025 applies. Section 19(1) lists deductions from income under the head Salaries. Serial number 7 of its Table covers payment in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government. It also covers similar schemes for central civil servants, all-India services, defence services, state government employees and employees of local authorities and statutory corporations. The deduction is the entire amount. So a central government pensioner pays no income tax on the commuted lump sum. This replaces section 10(10A)(i) of the 1961 Act.

Source: Income-tax Act, 2025, section 19(1), Table, Sl. No. 7 (incometaxindia.gov.in)

The monthly pension is a different matter. Section 16 of the 2025 Act says "salary" includes any annuity or pension, so the reduced basic pension and the DR are taxed as salary income, with the standard deduction in section 19 available against them.

Source: Income-tax Act, 2025, section 16(b) (earlier section 17(1)(ii)): salary includes any annuity or pension

Checklist before you sign the form

• Find your age next birthday on the date the commutation will become absolute, and read the factor from the table above. Retiring at 60 means 61 and 8.194.
• Decide the percentage. Anything from a small share up to 40% is allowed.
• Work out the lump sum: commuted portion × factor × 12.
• Check the monthly pension you will live on: basic pension minus the commuted portion, plus DR on the full basic pension.
• Note the date the lump sum is credited. Fifteen years from that date your full basic pension comes back.
• The implied rate is about 9% a year; compare it with the rate on whatever you would do with the money.
• Match your figures with the commutation amount on your pension authority papers. If they differ, ask your pension office before the money is paid.