Deepika Rathore
Article is focusing on Tax Treatment of Various retirement benefits i.e Gratuity, Leave Encasement, Commuted Pension, Uncommuted Pension, Statutory Provident Fund, Recognised Provident Fund and Unrecognised Provident Fund.
Page Contents
GRATUITY
Gratuity is a payment made by Employer to an Employee in appreciation of the Past Services Rendered By the Employee.Gratuity can Either be Received by:-
a) The Employee Himself at the Time of Retirement
b) The Legal Heir on the event of the death of the Employee.
Gratuity received by an Employee on his Retirement is Taxable under the Head “Salary” Whereas Gratuity received by the Legal Heir of the Deceased Employee Shall be Taxable under the Head”Income From Other sources”.
As Per Payment of gratuity Act 1972 Gratuity Shall be Payable to an employee on the termination of his Employment after he has rendered continuous Service for not less than 5 Years:-
a) on Superannuation
b) on Retirement or Resignation
c) on Death or Disablement due to accident or Disease
However , the Completion of Continuous Service of 5 Years shall not be necessary where the Termination of the Employment of any Employee is due to Death or Disablement.
EXEMPTION OF GRATUITY UNDER SECTION 10(10)
| Government Employees & Employees of Local Authority | Employees Covered under Gratuity Act | Any other Employees/Employees not Covered under Grauity Act | |
| Fully Exempt | Minimum of the following three limits:-
1) Actual Gratuity Received 2) 15/26*last drawn Salary*Completed Year of service 3) Rs. 20,00,000 Salary Means:-Basic + *Dearness Allowance *whether forming part of retirement benefit or not Completed Year of Service:- More than 6 Months Shall be Taken as Completed Year. A Period of 6 Months or Less than 6 Months shall be ignored. |
Minimum of the following three limits:-
1) Actual Gratuity Received 2) 1/2*Average Salary *Completed Year of Service 3) Rs. 20,00,000 Salary Means:-Basic Pay+Dearness Allowance(to the extent forming part of retirement benefits)+Commission(Fixed Percentage of Turnover) Average Salary Means:-Average Salary of Last 10 Months Preceding the Month in Which Retirement occurs. Completed Year of Service:- A Period of 6 Months or Less than 6 Months shall be ignored. |
NOTES:-
1. Where an Assessee had Received Gratuity in any Earlier Years and had Claimed Exemption Under Section 10(10) in Respect of the Gratuity Received Earlier also, he will still be Entitled to this Exemption but the Limit Which at present is 20,00,000 shall be reduced by the Amount of exemption availed in earlier Year. If Gratuity is Received from More than one Employer in the Same Previous Year, by an Employee the Limit of Rs. 20,00,000 Would Apply to the Aggregate of Gratuity Received from one or more Employers.
2. The word “Completed Service” occurring in Section 10(10) should be interpreted to mean an employee’s total service under different employer, provided he was not paid
Gratuity by former employer.
3. Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax (Circular No. 573 dated 21.8.90).
PENSION
Pension is a payment made by the Employer after the Retirement /Death of the Employee as a Reward for Past Service.
Pension is normally paid on Monthly Basis but Employees can also receive a lum sum amount by Surrendering such portion of pension ,this is known as Commutation of Pension
UNCOMMUTED PENSION
It is Fully Taxable in the Hand of all Employees,Whether Government or Non Government.
EXEMPTION OF COMMUTED PENSION UNDER SECTION 10(10A)
| Government Employees & Employees of Local Authority and Employees of Statutory Corporation | Any other Employees |
| FULLY EXEMPT | If Gratuity is not Received
1/2 of Normal Pension is Exempt If Gratuity is Received 1/3 of Normal Pension is Exempt Normal Pension means:- Total Pension which Employee is Entitled to Receive at the time of retirement. includes (commuted pension and uncommuted Pension). |
NOTE:-
Family Pension Received by the legal Heirs after the Death of the Employee is Taxable in the Hands of the Legal Heir under the Head “Income from Other Sources” Because in this Case there is no Relationship of Employer and Employee.
LEAVE SALARY
Employees are Entitled to Various Type of Leave While in Service. The Leave May either be availed by them or in Case These are not Availed of,these may either lapse or these are allowed to be encashed every year or these are accumulated and encashed after Retirement or Death,but in most the cases the Employee is Entitled to accumulate his unavailed leave and encashment of such accumulated leave is done only at the time of Retirement/Resignation or Death.
ENCASHMENT OF LEAVE DURING TENURE OF SERVICE:-
It is Fully Taxable in the Hand of all Employees,Whether Government or Non Government. However relief can be taken under section 89.
EXEMPTION OF LEAVE ENCASHMENT AT THE TIME OF RETIREMENT UNDER SECTION 10(10AA)
| Government Employees & Employees of Local Authority and Employees of Statutory Corporation | Any other Employees |
| FULLY EXEMPT | Minimum of the following Four limits:-
1.) Leave Encashment Actually Received 2.) 10 Months * Average Salary per Month 3.) 3,00,000 4.) Unavailed Leave as per Income Tax * Average Salary Per Month/Per Day Salary Means:-Basic Pay+Dearness Allowance(to the extentforming part of retirement benefits)+Commission(Fixed Percentage of Turnover) Average Salary Means:-Average Salary of Last 10 Months Preceding the Date on Which Retirement occurs. Unavailed Leave:- Unavailed Leave is Calculated on the basis of Maximum 30 Days Leave for Every Year of Actual Service Rendered to the Employer from Whose Service he has Retired.This is Calculated in Below Manner. In Days:- 30 Days * Number of Years of service – Actual Availed Leave In Months:- 1 Month * Number if Years of Service – Actual Availed Leave |
NOTES:-
Leave Salary Paid to legal Heirs of a deceased Employee in Respect of Privilege Leave Standing to the Credit of Such Employee at the time of His/Her Death is an Ex Gratia Payment on Compassionate Grounds in the Nature of Gifts.Thus the Payment is Not in the Nature of Salary.
Where an Assessee had Received Leave Salary in any Earlier Years and had Claimed Exemption Under Section 10(10AA) in Respect of the Leave Salary Received Earlier also, he will still be Entitled to this Exemption but the Limit Which at present is Rs. 3,00,000 shall be reduced by the Amount of exemption availed in earlier Year.
If Leave Salary is Received from More than one Employer in the Same Previous Year ,by an Employee the Limit of Rs. 3,00,000 Would Apply to the Aggregate of Gratuity Received from one or more Employers.
PROVIDENT FUND
Provident Fund Scheme is a Welfare Scheme for the benefit of Employees.Under this Scheme,certain Sum is deducted by the employer from Employee’s Salary as his Contribution to the Provident Fund every Month.The Employer Also Contributes a Certain Percentage of the Salary of the Employee to Provident Fund.These Contributions are deposited/invested.The Interest Earned is also credited to provident fund Account of the Employees.
TAXABILITY OF PROVIDENT FUND:-
| STATUTORY PROVIDENT FUND(SPF) | RECOGNISED PROVIDENT FUND(RPF) | UNRECOGNISED PROVIDENT FUND |
| Exempt | 12% of Salary
OR Actual Contribution by Employer Whichever is Less is Exempt Salary means Basic Pay, Dearness Allowance (forming part of Retirement Benefits), Commission(Fixed percentage of turnover) |
Exempt |
| Not Taxable and Eligible for Deduction under section 80C | Not Taxable and Eligible for Deduction under section 80C | Not Taxable |
| Exempt | 9.5% of Accumulated Balance
OR Actual Interest by Employer Whichever is Less is Exempt |
Exempt |
| Exempt |
Exempt |
Employer Contribution
Fully Taxable Interest on Employer Contribution Fully Taxable Employee Contribution Exempt Interest on Employee Contribution Taxable under “Other Sources Head” |
(Republished with Amendments)
After retirement/VRS, amount received in Employee Credit Society benefit is exemption in income tax. If yes which section exempted,
What will be the tax liability in India in case of a resident (holding foreign citizenship) receiving tax free retirement benefits like social security, pension etc outside india as his global income is to be taxed in India?
GALANTRY AWARD WINNERS ARE ALSO EXEMPT FROM TAX ON PENSION
Awaiting response on my query
Would like to know who is a government employee? An employee, belonging to a government company, as may be defined under Companies act, would he/she constitute government employee? PSU, where the holding of government is more than 51%, would it constitute government company? Where the holding of Governement is 100%, would it constitute a PSU or Government Company?There is no concept of PSU in Income Tax Act, but treatment for tax purposes is not in line with the one provided for government employees. Can you please clarify? This would impact the tax liability of the PSU employee substantially and adversely.
Would like to know who is a government employee? An employee, belonging to a government company, as may be defined under Companies act, would he/she constitute government employee? PSU, where the holding of government is more than 51%, would it constitute government company? Where the holding of Governement is 100%, would it constitute a PSU or Government Company?There is no concept of PSU in Income Tax Act, but treatment for tax purposes is not in line with the one provided for government employees. Can you please clarify? This would impact the tax liability of the PSU substantially and adversely.
deepika rathaur ji.
good article on pension and taxes. but art 10 of IT does not speak much about IT by defence pensioners hence there is much confusion in CPPC of different banks.
Some retired defence persons get say total 100000/- as total pension credited to bank. Out of this say 7800/- is disability pension. Rest 9220/0- of their pension is taxable or not ??. Also clarify is this amount 92200/- called service element (SE) of pension. Neither banks, nor CPPC, nor CDA pension allahabd, nor CBDT has really clarified this.
A concise yet informative article at the right time of the year. Well done.
D.Prem Nath
Chief Manager (rtd)
I O B