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These plans areexcluded from tax on your federal return, but not onyour state income tax return. Once you retire and beginto receive pension benefits, you will pay federal tax onyour retirement payments, but you will not pay PA taxon those benefits.
PENSION. 1  Pension is a retirement benefit; this is taxed as salary in the hands of the employee. 2  Tax is deductable under section 192 of income tax act on payment. 3  Family pension received by the dependence of the employee is taxable under the head income from other source.hat is the tax treatment for family pension received by the legal heirs of a deceased employee. It will be taxable under the head âincome from other sourceâ .under section 57(iia) a standard deduction shall be allowed to the legal heir @33.333% of such pension or Rs. 15,000, whichever is less.