The 89-year-old woman, who reportedly had dementia, is thought to have died of natural causes in June last year.
Her son, 66, is said to have put her body in his cellar and used ice packs and bandages to mask the smell.
Police believe he may have illegally received about €50,000 (£42,000) in payments.
The suspected fraud only came to light after a new postman delivering the woman’s benefits in the western Tyrol region was refused a request to see her, police said in a statement.
That sparked an investigation, and led to the subsequent grisly discovery.
Police told Austria’s public broadcaster ORF that the suspect had also covered his mother with cat litter.
“Ultimately, the corpse was mummified,” officer Helmuth Gufler said, adding that the man had confessed.
Mr Gufler said the man had no other income, and had told them that the payments would have stopped immediately if he had reported the death, leaving him unable to afford to pay for his mother’s funeral or to keep the house they had shared.
The suspect also said he had told his brother that their mother was receiving care at a hospital, and that it was not worth visiting as her condition meant it was unlikely she would recognise him, ORF reported.