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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110 Comments

  1. MAHAVEER SURENDRA MUNGALE says:

    After retirement as District Judge, I received some amount towards G.I.S. (GROUP INSURANCE SCEME). Whether this amount is taxable or exempted under section.10 of Income Tax Act?

  2. SUKHDEV RAJ GUPTA says:

    as a nominee(declared by deceased nominee), my son(other than legal heirs) received gpf amount from AG HP. my question:
    1. what is the liability of tax on gpf amount received by him?
    2. can he utilize the amount himself or otherwise?

  3. Sunil says:

    I was Retired from bsnl under VRS 2019 option. In jan 2020. I got Exgrecia from bsnl. Sir, how much amount will be Income Tax related?
    Regards
    Sunil kumar Aneja 9463200600

  4. SURENDRA MOHAN says:

    Sir, I retired from railway services in July 2019. Under which sections Death cum retirement gratuity, pension communication,Provident fund,leave encashment amount received are exempted for filing ITR and in which form to file my ITR. Whether all these payments are fully exempted from Income tax .Is it necessary to show all these payments in ITR even if these are fully exempted from Income tax. Please clarify. Thanks Surendra Mohan

  5. Roshan says:

    Sir my salary income is 14 lacs.i got received terminal benefits rs.55 Lacs all are exempted for TDS.Which form I should file,ITR 1 or Total amount exceed 50 Lacs .I have no other income.

  6. goyalm says:

    I retired on 31/08/2019.My employer has not shown all the retirement dues in my form 16 and also not being shown in 26AS , as there are benefits which are exempted under section 10(10) like gratuity,leave encashment,commutation of pension and my accumulated pf and vpf etc.
    Should these be shown in my IT return for the AY2020-21.
    If I enter all the retirement benefits as in lieu of salary,the figure will not match the amount shown in 26AS ,also as per form 16
    Pleaseguide how to show the same in IT return and in which column of the ITR form 1
    thanks

  7. Jyotsna says:

    I am a retired employee. My commutation amount was held because of extension opted by me for stay in staff quarters I have vacated the same in March . because of COVID not received the payment till date. Can I claim interest for the months company has my money as I am loosing interest for the said amt

  8. g gururaj says:

    sir,
    one of our official is expired after applying vrs, within due date of the scheme and our corp office has accepted retirement under vrs scheme, and approved for terminal benefits, like gratuity,ex- gratia , service award amounts payable to nominee. kindly inform me whether we have to deduct tds on gratuity, ex-gratia and service award

  9. SHIVADAS Shankhpal says:

    Myself retired from Maharashtra govt. On. 31st May 2019.i have received GPF amt. GIS Amt. Leave encasement. But yet not received monthly pension I. e.pending In treasury office also graduaty not received. In this stage which form is suitable to file Return Of current financial year 2019-20

  10. RAMESH TUKARAM PANDATWAD says:

    MY cLIENT IS A TEACHER AND HIS SALARY INCOME AND HIS HUSBAND IS EXPIRED HIS HUSBAND PENSION INCOME RECEIVED, PENSION INCOME INCLUDED IN MY INCOME OR NOT PLEASE

  11. Divakar says:

    Retired from an aided college at Mumbai. The commuted pension works out to 35 lacs. The full pension amount per month is 100350/-, out of which Rs.61410/- will be the balance pension after commutation.
    PF is with GENERAL PROVIDENT FUND, only employee contribution.
    Gratuity will be the max i.e. 20 lacs.
    Kindly guide me how much of the above commuted pension will be taxable.

  12. PIYUSH AGRAWAL says:

    One of my clients is widow her husband was working in naval dockyard during the duty her husband expired and now she is receiving pension per month so whether it is taxable or not and while filing the income tax returns which ITR to be select

  13. RAVI says:

    SAF fund payment post retirement has two components (a) lump sum payment of certain amount and (b) monthly payment
    Its not clear if Sec 10(13) allows monthly payment received as tax free.
    Can you provide clarification?

  14. gorbalu says:

    I had retained in jan -2018 at the time amt of Rs.78730/-for group Insurance Please give me guidline of Section Under exemption

  15. virender says:

    after 6 yers of service my firmtook decion to give vrs to 50% emplyees. they gave me early bird incentives rs435000.vrs lump sum rs 493504 incentives rs400000 addional benefits 128168 medical cashout 105666my gross income including salary comes to 88903 and deducted tax on1703625 comes to332626 kindly guide.

  16. vinod kumar says:

    i am working asagent of new india assurace company and have office and staff durind ay 2017-18i ireceived commission under 194h and 194d as 1816606.in my return i filled thid turn over in 44ad and shown profit more than 8% clause.now income tax authoritises considered my turn over asincome from other sorces and demanded tax on all my commition amout and adjusted tds of rs 156500 agaist the demandDuring ay year 18-19 refund of 90700 was relesed on the same pattern ,the same compay deducted tds u/S 194h and 194d and department released the refund ,PRIOR TO THID I AM GETTING REFUND FROM THE LAST 7 REARS BY SHOWING TURN OVER UNDER 44aD WHAT I DO AT THIS STAGE,PL GUIDE

  17. vinod kumar says:

    after 6 yers of service my firmtook decion to give vrs to 50% emplyees. they gave me early bird incentives rs435000.vrs lump sum rs 370128 incentives rs400000 addional benefits 139553 medical cashout 105666my gross income including salary comes to 1797517 and deducted tax on1703625 comes to332626 kindly guide.

  18. Sunny Varghese says:

    I am working working with Central PSU (Miniratna II) from 1982 under EPFO scheme of 1995. My retirement date on 31st May 2019 & need an amount of Rs.8 lakhs for purchase of Home in native place other than the working place. Iam already took Supernnuation loan of Rs.7 lakhs during last year, the balance available Rs.13 lakhs approx. including Employer/Employee share. Now 2-3 months salary will get from employer, can I get 2nd time supernnuation loan from my EPFO fund. Thanks

  19. M V S MURTHY says:

    On completion of 26 years of service as on 02.07.2019, I would like take VRS. Please know me, what are the taxable amounts in the following:
    1.Gratuity
    2.Commutation amount
    3.EL encashment amount.

  20. ASHOK VISPUTE says:

    A person got VRS in the age of 56 years and he claimed his 1/3rd commuted amount of superannuation fund after the retirement age i.e 58 or 60. Whether in this condition he is liable for Tax.

  21. Anil R Khadye says:

    I took VRS in Oct 2017. Now my PF is kept with the bank PF trust. The bank gave us option to keep it for maximum period of 3 years at the trustees rate of interest. After 3 years they said that we will not get any interest on the said PF and we have to withdraw it.

    My question is whether the interest we are going to get after retirement is taxable or not.

    Thanks

  22. p krishnamurthy says:

    sir
    can i join in your firm ,i will retire from psu in the month of dec2018.i will be settled at hyderabad.do you have any branch at hyderabad.

  23. R.Gopalakrishnan says:

    is tamil nadu agricultural university coming under state government for exemption of Earned leave encashment at the time of retirement. urgent please repy

  24. SANDIP GARAI says:

    Sir,
    My father retired from PSU(SAIL) on Aug2018 and he got:
    1. Retirement beniefit
    2. PF
    3. Gratuity
    4. LIC maturity
    5. Post office
    6. Savings Interest
    Now please guide me which amount will exempt from Income Tax and how much amount.
    how fill it in IT site. An early reply will highly expected.
    Thanks and regards

    1. G VENKATESWARA RAO says:

      sir i took VRS in the AY 2021 April from SBI on account of cancer. i got gratuity 20 lakhas, Pf 10. 80 PF 10.80 and leave encashment is 15860000 . How can I show in It submission in this Assemebt year 2022_23 July end is last date

  25. Devaraj says:

    One teacher is already getting family pension as her was also a govt.teacher who died 3 years ago.Now she is also retired in May 2018.Now she has to file her tax return.whether it is necessary to add her family pension with her pension as salary ?

  26. 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

  27. 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

  28. 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

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