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. Some of these are described below:-
Pension is described in Section 60 of the CPC and Section 11 of the Pension Act as a periodical allowance or stipend granted on account of past service, particular merits, etc. It involves three essential features. Firstly, pension is a compensation for the past service, secondly, it owes its relationship to a past employer-employee relationship or master servant relationship. Lastly, it is paid on the basis of earlier relationship of agreement of services as opposed to an agreement for service.
Pension received from a former employer is taxable as salary. As such the relevant provisions of TDS as specified in Section 192 and other relevant provisions are also applicable to pension income and tax is deductible on the same as it is in the case of payment of salary.
It has been clarified by CBDT vide circular NO. 761 dt. 13/01/98 that in the case of pensioners receiving pension through nationalized banks, provisions of TDS are applicable in the same manner as they apply to the salary income.
From the income being paid as pension the banks are required to allow deductions under chapter VIA.
Similarly relief u/s 89(1) for the arrears of pension received is also to be granted by the banks. Instructions in this regard have been issued by Reserve Bank of India vide R.B.I’S pension circular (Central Series) No.7/CDR/1992 (Ref No. PGBA. GA:(NBS) No. 60 / GAG4(11CVL)-91/92) DT. 27/4/92.
All branches of all banks are bound u/s 203 to issue certificate of tax deducted in Form No.16 to the pensioners. This has also been clarified vide CBDT circular No. 761 dt. 13/1/98) 5.2.1
Retirement benefits receivable by an employee is taxable under the head ‘salaries’ as “profits in lieu of salaries” as provided in section 17(3). As such they attract the provisions of TDS as prescribed in section 192 and other relevant sections. Accordingly, the employer must take them into account and compute the TDS at the time of retirement of an employee. However some of these retirement benefits are exempt from taxation u/s 10 either fully or partly. The details of these exemptions are being given below. The remaining retirement benefits are includible under the head salaries as described earlier and tax is deductible as provided in the preceding chapters.
(i) Any death cum retirement gratuity received by Central Government and State Government 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 amount calculated as per sub section (2) & (3) of section (4) of that Act.
(iii) Any other gratuity shall be subject to following limit:-
a) For every completed year of service or part thereof, gratuity shall be paid at the rate of fifteen days wages based on the rate of wages last drawn by the concerned employee.
b) The amount of gratuity as calculated above shall not exceed Rs. 20,00,000.
(iv) In case of any other employee, gratuity shall be exempt subject to the following exemptions:-
a) Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service or Rs. 20 lakhs whichever is less.
b) 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 over all limit being Rs. 20 lakhs.
As per Board’s letter F.No. 194/6/73-IT(A-1) Dated 19.06.73 exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will qualify 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 21.08.90).
In case of employees of Central & State Government, local authority, defence services and corporations established under Central or State Acts, the entire commuted value of pension is exempt.
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 of commuted value upto 1/2 of the pension (Circular No. 623 dt. 6. 1. 1992)
(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) 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 a maximum of 10 months of leave encashment, based on last 10 months average salary. This is further subject to a limit of Rs. 3,00,000 for retirement or superannuation or otherwise after 1.4.98 (Notification SO. 588(E) dt. 31.5.02)
(iv) Leave salary paid to legal heirs of the 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.J. Shahney 159 ITR 160 (Madras)).
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) The sum calculated on the basis provided in Section 25 F(b) of the above Act.
(ii) The above is further subject to an overall limit of Rs. 5,00,000 (Notification No. 10969 F. No. 200/21/97- IT(A-1) dt. 25.6.99).
The limits are not applicable where it is paid under a scheme of Central Government for extending special protection to the workmen.
(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) Cooperative 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.
(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.
(iv) With effect from 1.4.20 10 where any relief has allowed to the assessee u/s. 89, for any A.Y. in respect of any amount
received or receivable, no exemption under this clause shall be allowed to him in relation to such or other Assessment Year.
Any payment received from a Statutory 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 Government 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.
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 incapacitate.
Company employees: Section 10(15) of the Income Tax Act incorporates a number of investments, the interest income 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’. 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-NSII dated 12.12.1990.
Republished with Amendments