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:-
Page Contents
- 1. What is Pension?
- 2. TDS on Retirement Benefits
- 3. GRATUITY [Sec 10(10)]
- 4. Commutation of Pension [Sec 10(10A)]
- 5. Leave Encashment [Sec. 10(10AA)]
- 6. Retrenchment Compensation[Sec. 10(10B)]
- 7. Compensation on Voluntary Retirement or “GOLDEN HANDSHAKE”
- 8. Payment from Provident Fund:
- 9. Payment from approved Superannuation Fund:
- 10. Deposit scheme for retired Govt./Public Sector
1. What is Pension?
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.
1.2 TDS on payment of pension through Nationalised Banks:
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.
1.3 Issue of TDS certificate to pensioners:
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
2. TDS on Retirement Benefits
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.
3. GRATUITY [Sec 10(10)]
(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).
4. Commutation of Pension [Sec 10(10A)]
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)
5. Leave Encashment [Sec. 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) 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)).
6. 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) 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.
7. Compensation on Voluntary Retirement or “GOLDEN HANDSHAKE”
(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.
8. Payment from Provident Fund:
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.
9. Payment from approved Superannuation Fund:
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.
10. Deposit scheme for retired Govt./Public Sector
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
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Dear Sir
As per court order, I am liable to pay an amount of Rs. 5 lakhs to the government as a pro-rata pension contribution for the service worked for the Government of Kerala. This payment will enable me to avail statutory pension of the Central Government in the future, Can I claim income tax benefit for the above amount in any section other than 80(c).
A person who retired from state Govt. He got terminal benifits which are tax free like GPF. Commutation of pension @ Leave encashment. Kindly let me know if he has to disclose these ammounts in the ITR
Sir,
Whether payment of pension by exempted Trust Fund (from Income Tax) is liable for TDS?
WHETHER 1/3RD COMMUNITATION AMT. RECEIVED ON RETIREMENT IS FULLY EXEMPT OR IF NOT THAN HOW MUCH ? GRATUITY IS ALSO RECEIVED.. BANK EMPLOYEE.
Even though a deductor is bound to issue form 16, i have not seen any deductor issuing this form. Even the banks don’t issue in case of pensioners and to others who pay tax on interest on fixed deposits.
Can you clarify if pension/annuity received from LIC in terms of arrangements with employer wherein employer has remitted the superannuation fund balance to LIC and arranged for annuity disbursements is taxable?
Secondly, the full annuity corpus is encashable from the Annuity providers. AS annuity providers are giving less interest/pension than Post office Small saving Schemes. As Loss to annuity holders by less interest/pension.
Hi , I raised online PF claim only for pension. Whether TDS is applicable for pension amount? i worked 2 years on that company , i requested online claim for 10C form only..
Pensioners above 60 Years of age ( Senior Citizens ) need not pay Advance TDS.
Sir I retired from PSU Bank in October 2016. My I.Tax was deducted on leave encashment >Rs.300000/= meaning thereby tax @33% was paid aprox Rs. 1.50 Lac extra. As PSU employees & Non-Govt. employees (NGE) are treated at par. In My view it is against “Right To Equity before Law”. Reason:
1. The Rules & Regulations, salary etc. is approved by Parliament. Not applicable to (NGE).
2. We are deputed for election duty & many other Govt. sponsored programmes, while N.A. to (NGE).
3. Likewise, many more issues stand on same footing like Police can’t file any chargesheet against PSUs employees too unless approved by employer, which is N.A. to (NGE).
4. PSUs employees have to file their Assets & Liabilities statements and also with “LOKPAL”. CVC can initiate action against them on any complaint. All complaints against AGMs & above are registered with CVC by default as in case of Dy. Sec. or above in Central Govt. N.A. to (NGE).
5. All PSUs are covered under RTI directly and not indirectly, like school, society or trust who are indirectly covered under section 2 (f) of RTI ACT. N.A. to (NGE).
6. I have been given to understand that Chennai & some other H.Cs. accepted the cases & delivered verdict in favor of PSU employees as they are treated as “Public Servants” for all purposes.
Friends, i got my PF and compulsory insurance benefit after retirement from Air force, through NEFT to my savings a/c. Now evrey time i withdraw money from that fund TDS is collected by my bank.How can i get TDS back as the amount deposited is excempt from tax deduction.
Whether amount received on Maturity(matured after 10 years) of Pension Plan of ICICI PRUDENTIAL LIFE INSURANCE, IS EXEMPT ?
i am getting family pension of rs.11751 but bank duducting rs. 3572 per month in the name of tds. they said this is as per letter from i t deptt. is it ok. how can i get my deducted money. i am retired 15 years ago. please help
I retired from Northern Coalfields Limited, a PSU. Now getting pension from the SBI. No tax has been deducted from pension. None issue me FORM-16. Should I fill the ITR-1 showing my pension as salary income? And this requires TDS in Form-16, Tax Deducted as ZERO. I am doing this in last five years. Or should I show the pension as Income from other sources like pension receipt from ICICI PRU Life.
I approached my bank branch. They said none send the form -16 for you.
Your article make me re-look the issue. As there is difference in FORM 26AS, none has any objection.
When we deposit money in pension scheme like as SBI life insurance, LIC & others. the maturity/premature amount is wholly Taxable? For a Example…I paid Rs.130000/- through Rs. 10,000/- Per year a premium on SBI life insurance pension scheme. I withdraw the policy premature. The Company calculated TDS on the whole Amount that is Rs. 1,91,451/-
I have paid the premium every year and my tax is clear till today. Now My question is How the Taxation cane be done twice on the same amount of income?
Dear Sir,
1. Can any one please clarify what are the elements are taxable income in an pension ? is it Basic pension, DA and medical allowances .
2. The deduction of commutation from the pension are taxable ? Kindly explain.
Can you clarify if pension / annuity received from LIC in terms of arrangements with employer wherein employer has remitted the super annuation fund balance to LIC and arranged for annuity disbursements is taxable ?
I hope it is not possible to give the Pension Money by any Treasury Officer, the Treasury Officer give the consent for payment of Pension to the related Bank or Post Office.as per the Order of the Relevant Govt Concerned.In this regard the Form 16 may be issue by the Bank to the pensioner as the pensioner get the Pension Amount from the Bank.
This article is most valuable for all Pensioners as well as help to know who is the liable to give the Form 16 to the Pensioner also.
Dear,What about TDS,if pension is paid by Treasury Officer ?–I am a retired Gujarat Government Employee.-V.K.Shah. 05/02/2012.