Yes, Indiana taxes pension income, but with important exceptions. For the 2026 tax year, the taxable portion of your pension is subject to 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 Social Security, railroad retirement, and military retirement pay are fully exempt, and federal civil service annuitants get a limited deduction. State and local government pensions, private pensions, and traditional 401(k) and IRA withdrawals get no special break.
The state rate is scheduled to fall again, to 2.9%, in 2027 and beyond. Those reductions were set by legislation passed in 2023 and are not tied to revenue triggers.2Indiana General Assembly. Indiana Code 6-3-2-1 – Imposition of Tax; Tax Rate; Calculation
Retirement Income Indiana Doesn’t Tax
Social Security benefits are fully exempt. Even where part of your Social Security is taxable federally, Indiana subtracts the entire amount when calculating state taxable income. Railroad retirement benefits get the same treatment.3Indiana 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 also fully deductible, 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.4Indiana General Assembly. Indiana Code 6-3-2-4 – Military Service Deduction; Retirement Income or Survivors Benefits Deduction A surviving spouse can claim it, and you don’t need to have been an Indiana resident during your service to qualify. One limit worth knowing: if an ex-spouse receives a share of military retirement through a divorce decree, that portion isn’t deductible for the ex-spouse. Only the service member or the service member’s surviving spouse qualifies.5Indiana Department of Revenue. Indiana Adjusted Gross Income Tax Applicable to Military Personnel
Federal Civil Service Annuities (CSRS and FERS)
If you receive a federal civil service annuity through CSRS or FERS, Indiana allows a deduction of up to $16,000 per year.6Indiana Department of Revenue. Civil Service Annuity Adjustment and Military Retirement or Survivors Benefits Deduction You must be at least 62 by year-end to claim it. Surviving spouses can claim the deduction regardless of age.7Indiana General Assembly. Indiana Code 6-3-2-3.7 – Remainder of Federal Civil Service Annuity Minus Certain Retirement Benefits; Deduction
The $16,000 figure is misleading on its own, because it must be reduced dollar-for-dollar by the Social Security and railroad retirement benefits you received in the same year.7Indiana General Assembly. Indiana Code 6-3-2-3.7 – Remainder of Federal Civil Service Annuity Minus Certain Retirement Benefits; Deduction If you receive $12,000 in Social Security, your available deduction shrinks to $4,000. If your Social Security is $16,000 or more, the deduction is wiped out. FERS retirees who paid into both systems often find this offset erases most or all of the benefit.
Retirement Income Indiana Does Tax
Indiana offers no special deduction for pensions from state or local government employment or private employers. If you retired from an Indiana public school system, a city police department, or a corporate employer, the taxable portion of your pension flows straight into your Indiana adjusted gross income and is taxed at 2.95% plus your county rate.
Distributions from traditional 401(k) plans, traditional IRAs, 403(b) plans, 457 plans, and similar tax-deferred accounts are fully taxable at the same rates, since those accounts were funded with pre-tax dollars.
Roth accounts are the exception. Qualified distributions from Roth IRAs and Roth 401(k) accounts stay out of federal AGI, so Indiana has nothing to tax. The state treatment mirrors the federal treatment.
Across every pension type, one principle holds: Indiana only taxes what was taxable federally. If you made after-tax contributions to a pension, the portion of each distribution that represents a return of those contributions is excluded from federal AGI and from Indiana taxable income as well.
Disability Retirement Deduction
If you retired on permanent and total disability before year-end, Indiana offers a separate deduction. A physician must have determined that the condition has lasted or is expected to last at least one year, or is expected to result in death.8Indiana General Assembly. Indiana Code 6-3-2-9 – Disability Retirement; Deduction; Amount
The deduction is capped at the lesser of your actual disability payments or $100 per week ($5,200 annually). It phases down when federal AGI exceeds $15,000 ($7,500 if married filing separately). For joint filers where both qualify, the combined maximum is $10,400. It’s a small break, but worth claiming if you’re eligible.
County Income Tax on Pensions
Every Indiana county layers a local income tax on top of the state rate, and it applies to the same taxable income used for your state return. Whatever portion of your pension is taxable at the state level is also taxable at the county level.9Indiana Department of Revenue. Income Tax Information Bulletin 32 – General Information on Local Income Taxes
Rates vary. The expenditure rate alone can reach 2.5% in most counties and up to 2.75% in Marion County (Indianapolis), and counties can add further rates for special purposes.9Indiana 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-plus-local rate approaching 6% on taxable pension income. The Indiana Department of Local Government Finance publishes a certified rate report each year for county lookups.
Moving Into or Out of Indiana
If you earned your pension in another state but now live in Indiana, Indiana taxes it. Federal law assigns the right to tax retirement income to your state of residence when you receive it, not the state where you earned it.10Legal Information Institute. 45 IAC 3.1-1-7 – Allocation of Income Among States; Reciprocity Indiana’s reciprocal agreements with neighboring states cover wages, not pensions.
The reverse also holds. If you leave Indiana in retirement, Indiana can’t tax your pension even if you earned all of it through Indiana employment. Federal law bars states from taxing the retirement income of nonresidents.11Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
If you’re an Indiana resident who pays another state’s income tax on the same retirement income, Indiana allows a credit for taxes paid to the other state, capped so it can’t reduce your Indiana tax below what you’d owe if the out-of-state income were ignored.12Indiana 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
Indiana requires quarterly estimated tax payments if you expect to owe $1,000 or more in state tax for the year.13Indiana General Assembly. Indiana Code 6-3-4-4.1-b – Estimated Payments by Individual Taxpayers; Declaration of Estimated Tax At the 2.95% state rate, that threshold hits around $34,000 of taxable income before county tax is factored in. Payments are due April 15, June 15, September 15, and January 15 of the following year.14Indiana Department of Revenue. Payment of Indiana Estimated Tax by Individuals Missing them can trigger an underpayment penalty of 10% to 25% of the tax owed.15Indiana Department of Revenue. Fines, Fees and Penalties
The simpler route is to have your pension administrator withhold Indiana taxes from your payments. Submit Form WH-4P to the entity paying your pension. It lets you set a flat dollar amount for both state and county withholding, with a $10-per-payment minimum.