Yes, Indiana does tax pension income, but with important exceptions. For 2026, taxable pensions are hit with Indiana’s flat 2.95% state income tax plus a county income tax that varies by where you live.1Indiana Department of Revenue. Rates Fees and Penalties Military retirement pay, Social Security, and railroad retirement benefits are fully exempt. Federal civil service annuitants get a capped deduction. Everyone else, including retirees from state and local government, Indiana public schools, and private employers, pays the full rate on whatever portion of their pension is taxable federally.
Indiana starts with your federal adjusted gross income and applies state-specific additions and subtractions.2Indiana General Assembly. Indiana Code 6-3-1-3.5 – Adjusted Gross Income If a distribution is taxable on your federal return, it is taxable in Indiana too unless a specific deduction removes it. The flat rate drops again to 2.9% in 2027 under legislation passed in 2023.3Indiana General Assembly. Indiana Code 6-3-2-1 – Imposition of Tax; Tax Rate; Calculation
Pension Income That Indiana Does Not Tax
Social Security benefits are fully exempt. Even when part of your Social Security is taxable federally, Indiana subtracts the entire amount back out on your state return. Railroad retirement benefits get the same treatment.4Indiana Department of Revenue. Income Tax Information Bulletin 26 – General Information Concerning Filing Requirements and Specific Tax Benefits Available to the Elderly
Military retirement pay is exempt in full, with no dollar cap. The deduction covers retirement and survivor’s benefit income from any branch of the armed forces, including the National Guard, Space Force, Public Health Service Commissioned Corps, and NOAA Commissioned Officer Corps.5Indiana General Assembly. Indiana Code 6-3-2-4 – Military Service Deduction; Retirement Income or Survivors Benefits Deduction A surviving spouse receiving military survivor benefits qualifies as well, and you did not need to be an Indiana resident during your active service to claim it.
One important limit: if a divorced spouse receives a share of military retirement pay under a divorce decree, that portion is not deductible for the ex-spouse. Only the service member or the service member’s surviving spouse qualifies.6Indiana Department of Revenue. Indiana Adjusted Gross Income Tax Applicable to Military Personnel
Qualified distributions from Roth IRAs and Roth 401(k) accounts are also untaxed, because they are excluded from federal AGI to begin with.
Federal Civil Service Annuities: A Capped Deduction
If you receive a federal civil service annuity under CSRS or FERS, Indiana allows a deduction of up to $16,000 per year.7Indiana Department of Revenue. Civil Service Annuity Adjustment and Military Retirement or Survivors Benefits Deduction You must be at least 62 by the end of the tax year, though a surviving spouse can claim it regardless of age.8Indiana General Assembly. Indiana Code 6-3-2-3.7 – Remainder of Federal Civil Service Annuity Minus Certain Retirement Benefits; Deduction
The deduction is reduced dollar-for-dollar by any Social Security and railroad retirement benefits you received in the same year.8Indiana General Assembly. Indiana Code 6-3-2-3.7 – Remainder of Federal Civil Service Annuity Minus Certain Retirement Benefits; Deduction A $16,000 federal annuity paired with $12,000 in Social Security leaves only $4,000 deductible. Social Security of $16,000 or more wipes it out entirely. FERS retirees, who paid into both systems, often see little or nothing from this deduction.
Pensions That Are Fully Taxed
Indiana offers no special break for pensions from state or local government, Indiana public schools, or private employers. Distributions from traditional 401(k)s, traditional IRAs, 403(b)s, 457s, and similar pre-tax accounts are also fully taxed at the state rate.
One general rule works in your favor across every pension type. You are only taxed on the portion that is taxable federally. If you made after-tax contributions to your plan, the portion of each distribution that represents a return of those contributions is already excluded from federal AGI and stays out of Indiana taxable income.
Disability Retirement Deduction
Retirees who left work due to permanent and total disability can claim a separate deduction. A physician must certify that the condition has lasted or is expected to last at least a year, or is expected to result in death.9Indiana General Assembly. Indiana Code 6-3-2-9 – Disability Retirement; Deduction; Amount The deduction is limited to the lesser of your actual disability payments or $100 per week ($5,200 annually), and it phases down once federal AGI exceeds $15,000 ($7,500 if married filing separately). Joint filers can claim up to $10,400 combined.
County Income Tax Stacks on Top
Every Indiana county levies its own income tax on the same taxable income used for your state return. The expenditure rate alone reaches 2.5% in most counties and 2.75% in Marion County, and counties can add further rates for special purposes.10Indiana Department of Revenue. Income Tax Information Bulletin 32 – General Information on Local Income Taxes A retiree in a high-rate county can face a combined state and local burden approaching 6% on taxable pension income. The Indiana Department of Local Government Finance publishes certified county rates annually.
Pensions Earned in Another State or After You Move
If you earned your pension elsewhere but now live in Indiana, Indiana taxes it. Federal law gives the taxing right to your state of residence when the income is received, not the state where it was earned.11Legal Information Institute. 45 IAC 3.1-1-7 – Allocation of Income Among States; Reciprocity Indiana’s reciprocal agreements with neighboring states cover wages only, not pensions.
The reverse is also true. If you move out of Indiana in retirement, Indiana cannot tax your pension even if you earned every dollar of it through Indiana employment. Federal law prohibits states from taxing the retirement income of nonresidents.12Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
Indiana residents who end up paying another state’s income tax on the same retirement income can claim a credit, though the credit cannot drop your Indiana tax below what you would owe without the out-of-state income.13Indiana General Assembly. Indiana Code 6-3-3-3 – Taxes Paid to Other States; Liability for Income Tax to a Foreign Country
Withholding and Estimated Payments
If your pension administrator does not withhold Indiana tax, you may need to pay quarterly. Estimated payments are required when you expect to owe $1,000 or more in state tax for the year.14Indiana General Assembly. Indiana Code 6-3-4-4.1-b – Estimated Payments by Individual Taxpayers; Declaration of Estimated Tax At 2.95%, that threshold hits around $34,000 of taxable income before county tax is even factored in.
Quarterly payments are due April 15, June 15, September 15, and January 15 of the following year.15Indiana Department of Revenue. Payment of Indiana Estimated Tax by Individuals Missing a deadline triggers an underpayment penalty of 10% to 25% of the tax owed.16Indiana Department of Revenue. Fines, Fees and Penalties
The simpler path is to ask your pension administrator to withhold Indiana tax directly. Submit Form WH-4P to the payer (not to the Department of Revenue) and specify a flat dollar amount for state and county withholding, with a $10 per payment minimum.