1. Introduction – On retirement, an employee normally receives certain retirement benefits. Such benefits are taxable under the head ‘Salaries’ as ‘profits in lieu of Salaries’ as provided in section 17(3). However, in respect of some of them, exemption from taxation is granted u/s 10 of the Income Tax Act, either wholly or partly. These exemptions are described below:-

2. GRATUITY (Sec. 10(10)):

(i) Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt.

(ii) Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:-

(a) For every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned employee.

(b) The amount of gratuity as calculated above shall not exceed Rs 20 Lakh.(Limit increased to Rs. 20 Lakh with effect from 29.03.2018, earlier limit was Rs. 10 Lakh.) notification S.O. 1420 (E) dated 29.03.2018

(iii) In case of any other employee, gratuity received shall be exempt subject to the following limits:-

(a) Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service

(b) Rs. 10 Lakhs whichever is less.

Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 10 Lakhs.

As per Board’s letter F.No. 194/6/73-IT(A-1) dated 19.6.73, exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will quality for relief u/s 89(1).

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). 

3. COMMUTATION OF PENSION (SECTION 10(10A)):

(i) In case of employees of Central & State Govt. Local Authority, Defence Services and Corporation established under Central or State Acts, the entire commuted value of pension is exempt.

(ii) In case of any other employee, if the employee receives gratuity, the commuted value of 1/3 of the pension is exempt, otherwise, the commuted value of 1/2 of the pension is exempt.

Judges of S.C. & H.C. shall be entitled to exemption u/s of commuted value upto 1/2 of the pension (Circular No. 623 dated 6.1.1992).

4. LEAVE ENCASHMENT (Section 10(10AA)):

(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) if applicable may be claimed for the same.

(ii) Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.

(iii) In case of other employees, the exemption is to be limited to the least of following: (a) Cash equivalent of unutilized earned leave (earned leave entitlement can not exceed 30 days for every year of actual service) (b) 10 months average salary (c) Leave encashment actually received. This is further subject to a limit of Rs.3,00,000 for retirements after 02.04.1998.

(iv) 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 death is not taxable.

For the purpose of Section 10(10AA), the term ‘Superannuation or otherwise’ covers resignation (CIT Vs. R.V. Shahney 159 ITR 160(Madras).

5. RETRENCHMENT COMPENSATION (Sec. 10(10B)):

Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947 or any other Act or Rules is exempt subject to following limits:-

(i) Compensation calculated @ fifteen days average pay for every completed year of continuous service or part thereof in excess of 6 months.

(ii) The above is further subject to an overall limit of Rs.5,00,000 for retrenchment on or after 1.1.1997 (Notification No. 10969 dated 25.6.99).

6. COMPENSATION ON VOLUNTARY RETIREMENT OR ‘GOLDEN HANDSHAKE’(Sec. 10(10C)):

(i) Payment received by an employee of the following at the time of voluntary retirement, or termination of service is exempt to the extent of Rs. 5 Lakh:

(a) Public Sector Company.

(b) Any other company.

(c) Authority established under State, Central or Provincial Act.

(d) Local Authority.

(e) Co-operative Societies, Universities, IITs and Notified Institutes of Management.

(f)  Any State Government or the Central Government.

(ii) The voluntary retirement Scheme under which the payment is being made must be framed in accordance with the guidelines prescribed in Rule 2BA of Income Tax Rules. In case of a company other than a public sector company and a co-operative society, such scheme must be approved by the Chief Commissioner/Director General of Income-tax. However, such approval is not necessary from A.Y. 2001- 2002 onwards.

(iii) Where exemption has been allowed under above section for any assessment year, no exemption shall be allowed in relation to any other assessment year. Further, where any relief u/s 89 for any assessment year in respect of any amount received or receivable or voluntary retirement or termination of service has been allowed, no exemption under this clause shall be allowed for any assessment year.

7. PAYMENT FROM PROVIDENT FUND (Sec. 10(11), Sec. 10(12)):

Any payment received from a Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. Any payment from any other provident fund notified by the Central Govt. is also exempt. The Public Provident Fund(PPF) established under the PPF Scheme, 1968 has been notified for this purpose. Besides the above, the accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund is also exempt to the extent provided in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act.

8. PAYMENT FROM APPROVED SUPERANNUATION FUND (Sec.10(13)):

Payment from an Approved Superannuation Fund will be exempt provided the payment is made in the circumstances specified in the section viz. death, retirement and incapacitation.

9. DEPOSIT SCHEME FOR RETIRED GOVT/PUBLIC SECTOR COMPANY EMPLOYEES:

Section 10(15) of the Income Tax Act incorporates a number of investments, the interest from which is totally exempt from taxation. These investments may be considered as one of the options for investing various benefits received on retirement. One among them, notified u/s 10(15)(iv)(i), is the DEPOSIT SCHEME FOR RETIRED GOVT/PUBLIC SECTOR COMPANY EMPLOYEES which is a particularly attractive option for retiring employees of Govt. and Public Sector Companies. W.e.f. assessment year 1990-91, the interest on deposits made under this scheme by an employee of Central/State Govt. out of the various retirement benefits received is exempt from Income-tax. This exemption was subsequently extended to employees of Public Sector companies from assessment year 1991-92 vide notification No. 2/19/89-NS-II dated 12.12.1990. Salient features of the scheme are discussed below:

  • Rate of Return – Tax free interest @ 9% P.A. payable half yearly on 30th June and 31st December
  • Limit of Investment –   Minimum Rs. 1000. Maximum not exceeding the total retirement benefits.
  • Liquidity – Entire balance can be withdrawn after expiry of 3 years from the date of deposit. Premature encashment can be, made after one year from the date of deposit in which case interest on amount withdrawn will be payable @ 4% from the date of deposit to the date of withdrawal.
  • Other considerations: Only 1 account can be opened in own name or jointly with spouse. Account is to be opened within 3 months of receiving retirement benefits. Scheme is operated through branches of SBI and its subsidiaries and selected branches of nationalised banks.

[This scheme has been discontinued w.e.f. 10.07.2004 vide notification F. No.15-01/2004-NS-2, dated 09.07.2004.]

(Compiled by CA Sandeep Kanoi)

(Republished With Amendments)

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63 responses to “Taxability of Retirement Benefits”

  1. Usha Harugeri says:

    Where group insurance ca be exempt after retirement

  2. B Ramachandran says:

    1.Receiving pension Rs 25000 per month is it taxable?
    2Receiving dividend income Rs 17000 is Ito be included as income? Whether any exemption amount is available.
    Early reply is solicited to file return

    Senior citizen 63 yrs

    • G.K.S. says:

      Dividend income is exempt from tax, if it is received from Domestic Company and it is taxable if it is received from a foreign company. Please refer Sec 2 (22) of Income Tax Act,1961 for insight details.
      Commuted Pension is fully exempt in the hands of Government Employee. Whereas Uncommuted Pension is fully taxable.

  3. CS PRASAD says:

    I GOT Rs 5,30,000 GPF MONEY AFTER RETIREMENT FROM UNIVERSITY. WHETHER IT IS TAXABLE OR NOT

  4. A.K.Ramawat says:

    I think during F Y 2018- 19 your Salary Income will be treated as salary Income of A senior Citizen.

  5. Devendra Thakur says:

    My date of Birth is 02/01/1959 and will retire on 31st January 2019 ,salary received in F Y 2018 -2019 will be treated as Senior Citizen Or Normal Rate Will Be applicable for Income Tax Purpose,Up to how much amount Leave Encasement is Taxable,Please Reply

  6. Prashant Kumar says:

    I have taken voluntary retirement from the central government service after completed more than 23 years of service and I have received the following amount on retirement. Pl clarify out of all received amount are taxable :-

    GPF – 18 lacs
    Gratuity – 6.50 lacs
    Commuted pension – 11.72 lacs
    Leave encasement – 5.31acs
    CGGIS – 25 thousand

  7. PIYUSH MOYA says:

    i want all amendments related to taxation

  8. MUKESH M.PANCHAL says:

    Whether interest earned on PF balance till 3 years after retirement, would become taxable or tax exempted.

  9. anil dhall says:

    please i want to know i am retired from my job on
    april 2016 in private organisation after reteirment
    i have received around 13lacs.superannution fund
    & my employer deduct tds around 75 lacs. my company have own trust i think it approverd from
    IT deppt. so can u please tell me superannution find after reteriment is tax able or exempted.

  10. S S Gangopadhyay says:

    Dear Sir,
    I have retired in January 2017 and have got good amount against PF & Gratuity payment. Shall remain grateful if you could kindly let me know how to show it IT form and get exemption.
    Regards
    S S Gangopadhyay

  11. Inderjeet says:

    I retired in Feb 2016 n filed myI ITR WITH ALL, MY DUES INCLUDING PF PLUS INTEREST ETC for 2015/2016.NOW IN MAY 2016 WE RECEIVED INCOME FROM PF INVESTMENT ((DONE BY EMPLOYER BANKS A S ON 31032015 ).MY QUESTION

    IS THIS INCOME EXEMPT FROM TAX.

  12. Mainoddin says:

    Sir myself an employee of bank retired last month
    Recived 5lakh leave encashment and 10 lakh of can u explain me how I will be taxed

  13. Ibrahim says:

    Sir, I am going to retire from Cochin University (a state University) on 30th of November 2017 and I will get pensionary benefits as per Kerala Government Rules to the tune of Rs.14 lakhs towards DCRG, Rs. 20 lakhs towards pension commutation and around Rs.10 lakhs towards Leave encashment (for 300 days). Please clarify whether these income are taxable. Is there exist any dispute on this? Also please clarify whether I need to report the exempted income in the IT return.

    • Brahmanandan Nair N S says:

      These pensionary benefits are NOT taxble .Leave surrender while in service is taxable.Crystal clear rules,no disputes.No need to include these income on next IT return

  14. Prakash says:

    Dear sir,

    i want to withdraw my Superannuation so tell me what is the procedure?

    if i withdraw is it taxable ? if YES how much rate of interest? pls

  15. SUBRAMANIAM says:

    Dear Sir , I retired from TCIL on superannuation as there was a scheme that aby employee who has served for 20 years can retire. I was deducted Rs. 98000 as Tax . Thomas cook being private company tax was paid to bank at Mumbai directly by my employer. Is it possible to claim my tax money paid now . My retirement was in 2001 / 02 .( now i am 66 yrs )
    Please mail me on my e-mail . subra5950@gmail.com. Thank you sir .
    subbu

  16. rajendra dubey says:

    If a govt employee get 288000/- pension and 65000/- gits, 267000/- got in the AY 2016-17.
    How many tax payable.?

  17. Gajendra singh says:

    Respected sir.myself retired from state government servis on 31/12/2015 and recivedLeave encashment and government group insurense directly deposited in my Bank Account in F.Y.2016-17. it will be Exemted

    • Gajendra singh says:

      Respected sir.myself retired from state government servis on 31/12/2015 and recived Leave encashment and government group insurense directly deposited in my Bank Account in F.Y.2016-17. it will be Exemted?

  18. Ponnuchamy T says:

    sir, our company used to pay Rs.10000/- to the employee who is retiring from the service other than salary, pf, gratuity by cheque, please advice us that this Rs.10000/- Retirement Gift given by management is taxable or not.
    Immediate reply is requested.

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