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 10 Lakh.

(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 2 1.8.90). 

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 Y2 of the pension is exempt.

Judges of S.C. & H.C. shall be entitled to exemption of commuted value upto Y2 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 1 60(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(1 5)(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)

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59 responses to “Taxability of Retirement Benefits”

  1. A.K.Ramawat says:

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

  2. 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

  3. 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

  4. PIYUSH MOYA says:

    i want all amendments related to taxation

  5. MUKESH M.PANCHAL says:

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

  6. 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.

  7. 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

  8. 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.

  9. 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

  10. 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

  11. 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

  12. 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

  13. rajendra dubey says:

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

  14. 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?

  15. 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.

  16. sanjay patki says:

    Dear Sir I am Sanjay Ptaki I am taken Early ( 1 year) retirement from Philips India Ltd Vadodara
    I have received Rs 3 97000 /- As ex ) amount from Co. But I surprise That Rs 57900 Deducted from This Amount as income tax ( As per law Ex Gracie Amount is Exempted till 5.00 Lacs
    When I ask to Our hr Person He Told me This Exemption is not for Management EMPLOYEE
    so SIR PL CONFIRM THAT INCOME TAX AMOUNT DEDUCTED IS CORRECT

    Sanjay Patki
    9825137883
    sanjaypatki4@gmail.com

  17. Lal Mohan Patnaik says:

    Sir, I am going to retire in june,2018. I may get a terminal benefit of around 50 to 60 lakhs. Besides, I am also going to get pension around Rs.30000/- per month. I want to invest all my terminal benefits in some tax free investments to get regular income like deposit scheme for retired Govt./PS company employees under Sec. 10(15)(IV)(I). Kindly advise me, whether the above scheme is discontinued? If so, is there any other scheme like that for investment without much to worry about tax.

  18. Pankaj says:

    Dear Sir,
    In September 2013, I had joined a big group of companies in India, at that time I had opted for the monthly cutting to be in favour of Superannuation, so accordingly my company had started cutting some amount per month towards Superannuation. Later in Sept 2015, I was transferred within group but in different company. At that time, I opted for the amount to get in hand but my company refused to do so. My question is can I somehow stop the monthly contribution towards Superannuation and get the same in hand per month?
    Thanks,
    Pankaj

  19. Sekhar says:

    I was working in a company for over 20 yrs and the benefit of approved superannuation scheme with LIC was in place. After over 20 yrs of service
    the company transferred my service to one of its subsidiary company but the SAS contribution with the parent company continued. Retirement age of parent company
    is 60 yrs while 58 in the subsidiary. Only a year back, subsidiary company issued circular closing the SAS scheme of such transferred employees with the parent company by giving two options – total withdrawal of SAS from LIC through parent company or transfer accumulated SAS from parent company’s fund to subsidiary company’s newly opened SAS scheme. I have opted for total withdrawal but till date I have not withdrawn the fun from LIC through my parent company. As I shall be attaing age of 58 next year and retire as per my existing company (subsidiary) rules, if I withdraw the accumulated SAS fund after my retirement whether any income tax liability shall there ? Pls help me though the matter is little complicated.

    Regards

  20. APS says:

    sir, i have commuted the pension and the recovery of rs.5600/- made from pension every month. can i show this as tax exempted since the whole amount of commutation is tax exempt?

  21. Sanjib says:

    As Per My Knowledge,
    Employees Who Are In AP State Will Be Paid Service Compensation If Their Service Is More Than 1 Year But Less Than 4 Years And 10 Months.
    Employees Whose Service Is More Than 4 Years 10 Months, Gratuity Act Is Enabled And Not Service Compensation.

    Now my query : Is amount received as Service Compensation on separation/retirement taxable fully like income from Salary?
    If not what is the calculation for tax? Please suggest.
    Moreover is there any relief u/s 89 for Service compensation like Gratuity?

  22. T V RAAO says:

    Can you please show in which schedule of ITR 1 & 2 these exemptions are to be shown.

  23. Nurshing charan patnaik says:

    It may please be clarified if a Government servant dies at 7 PM on the date of his retirement, can his death be treated as death while in service?

  24. Girish Singhani says:

    Do I have to reflect the amount received on retirement on account of gratuity, commutation of pension, leave encashmentand and CGEIS payments from central government in the ITR. How to get the exemption for amount so received.
    Please guide

  25. N Subrahmanyeswara Rao says:

    I am a bank official & going to retire in this month. I Wii receive leave encashment of Rs.6.40 lakh and commutation of Rs.10.87 lakhs. Please advice the IT payable by me.

  26. Bhagwat says:

    R/Sir,
    I am woring in Local Govt.Punjab . I retired on 31.5.2015. I received Rs.441750/- as Leave in cashment. what the full amount exempted from I.Tax ? or only 3,00,000/- Lac is exempted?

  27. Rakesh says:

    Sir, Please inform on taxation of contribution to superannuation fund by employer, in the hand of employee, during contribution stage and on retirement. What is the regulatory section of Income Tax Act.

  28. S.K.Pattnayak says:

    Sir, Please inform me about the CGEIGS (70% in savings fund) received at the time of retirement is taxable or not. Thanks.

  29. S.K.Pattnayak says:

    What about the 70% of CGEIGS. Cumulative amount exempt from I Tax at the time of retirement? Thanks

  30. ac pancholi says:

    After retirement PF can be kept with RPFC for maximum 3 years and then after interest is not paid on corpus by RPFC. My question is whether interest earned during these 3 years is taxabe?

  31. Ajay Sehgal says:

    dear sir
    Pl gell r retirement benefits such as Gratuity, Leave encashment, GSLI n provident fund taxable or not Early reply expected

  32. Ajay Sehgal says:

    sir,
    Please let me know that benefits received on retirement viz leave encashment, gratutity and amount deducted on account of group saving life insurance and provident fund are taxable or not I retired fro HPState Coop Agri & Rural Dev Bank Ltd

  33. vinod says:

    Sir,

    I am a public ltd. company official. I have completed 20 year of service and still doing the service. I have withdrawal my superannuation fund which is managed by my company’s trust. They have deducted the Tax at source. Should I have to deposit additional income tax to income tax department as per my income slab or it is exempted under any act.

    kindly advise.

  34. P.prasad says:

    I was retired from nationalised bank under superannuation on 30-6-2014, received Rs.554348/- as leave encashment. The total amount received is fully exempted under I.T. Pl inform/advise .

    Thank you
    P.prasad

  35. M.S. Mharolkar says:

    Dear sir
    I am retired person from a public ltd co. Finally I received rs 54000 EL encashment adjusted in society loan payable. Gratuity Rs 338500 and PF Rs 276185. how do I show this in the e filing of return. as such my earning from salary for this year is less than 9 month salary Gross Mly salary is 33850. Do I need to pay any tax in advance. NO TDS was deducted at source.

    Please advise.

    With regards
    M.S. Mharolkar

  36. Shaik Madeena says:

    Sir,
    I have commuted the pension earlier At present I am receiving the reduced pension monthly after deduction of commuted value of the pension. Now I want to know whether the basic monthly pension is to be taken for calculation of Income tax or the reduced pension (i.e. the pension actually drawn) for this current assessment year.

  37. Krishnamoorthy.M says:

    Unearned Leave on Private Affairs (UEL on PA)salary received at the time of retirement is exemption or not?

  38. KANOJI C B says:

    I am a retired employee of a Nationalized bank since 4 years. The commuted pension value of Rs.5100 is deducted from my monthly pension. Kindly advise me whether the Gross Pension shall include or Exclude this commutation amount of Rs.5100.

  39. KANOJI C B says:

    I am a retired Nationalized Bank staff since 4 years. An amount of commutation of Rs.5100.00 is deducted every month from my pension. Please advise me whether the Gross Income shall be arrived after deducting the commutation of Rs.5100 or otherwise.

    • Yamin Mohammad says:

      I m retired in Aug 2017. I recevied CPF of one crore & gratuity of 20 lakhs n PRBS commutation 23 lakh from ongc. Kindly let me know how much we have to pay the taax

  40. Anurag says:

    Sir,
    I have submitted the technical resignation to my previous organization( State Govt.) and joined a new organization under central govt. I have taken Rs 4.40 lakhs towards leave encashment from my previous organization. Whether amount received against Leave encashment is tax free under sec 10 (10AA) of Income Tax act or it will be added to my taxable income for FY 2014-15.Pl. advice along with relevent section or citation if any.

  41. Vamsee krishna says:

    One of our employee taken VRS u/s 56k. Is his leave encashment exempted from tax.

  42. PIYARA LAL says:

    Sir,
    I retired from bank in the month of April and received leave encasement of Rs 603000/= Kindly advise me if this is totally exempted from income tax or have I to pay tax and at what rate
    Regards

    piyara lal

  43. aruna says:

    Mr. Krishna Leave encashment received during the employment is fully taxable

  44. rupesh khanvilkar says:

    Hi ,

    My dad has retired from government service . he has received provident fund , group insurance ,

    gratuity and he is getting pension 

    the retirement benefit amount is directly deposited into his bank account but we are worried for the next financial year because he has not received any documents with regards to retrement benefits 

    would he be taxable

  45. PG Krishnaiah says:

    Deposits are made out of my retirement benefits. What is the status of deposits in the name of my spouse. Do they come under gift etc or only the interest income is taxable.

  46. T.P.D'Souza says:

    With a new Central Govt.,can retirees of Public Sector Undertakings now hope that date of implementation of 6th.pay commission,Tax benefit of Gratuity enhancement to 10 Lakhs,Tax benefit of Leave Encashment to 10 Lakhs,at par with Central Govt.employees be implemented,
    at the earliest.The Government should know that these poor souls do not have the benefit of pension,leave alone D.A. linked pension.

  47. kuldip chand says:

    My retrecment amount is Rs.282734.00 for nine year service and my mnthly salary is Rs.63,592.00. Please advise do I have to pay tax on this. As CA said since you are not falling under Workman catagory its taxable. My office in Gurgaon and registered Under shop and Establishment Act.

  48. thiagarajan says:

    Contribution by employer to superannuation fund is it taxable in the hands of the employee. If so wha are the guideliness and exemptions. Clarify from the assessment year 2006-2007 to 2012-2013

  49. T.P.D'Souza says:

    What about retirees of Public Sector Companies,wholly owned by Government Of India,whose pay and perquisites are fixed by 6th.Pay Commission.Is leave encashment limit 10 Lakhs,like Govt.employees ?

  50. w. shital says:

    Whether Employees of PSU/Nationalised Banks to be treated at par with Central Govt. Employees for exemption of leave encashment at the time of retirement needs clarification.

  51. baskar says:

    Mr.krish,

    if it is during service, it would be fully taxable.

    if it is at the time of retirement,and if u r not a Government servant, 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 upto Rs.3,00,000.

  52. Sanjeev says:

    Leaeve Encashment received during service is fully taxable.

  53. R K JAIN says:

    Whether Public Sector Company (Wholly owned by GOI) employees are considered at par with Central Govt. employees as far as Leave Encashment is concerned????

  54. krishna says:

    sir, i received 15 days of encashment leave. it will exempt from IT

  55. krish says:

    SIR,I received every year 15 days of encashment leave.it will be exempt from it

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