Retirement Benefits Taxability | Income Under the Head Salaries

[Taxability of Gratuity, Taxability of Uncommuted and Commuted  Pension, Retrenchment Compensation, Leaver Encashment on retirement, Approved Superannuation fund]

Retirement Benefits
Income under the Head Salaries

Gratuity [Sec. 10(10)]: 

Gratuity is the sum paid by the employer to its employees in appreciation of its past services. Taxability of perquisites is given below for various types of employees:

Government employees

Employees covered under the Gratuity Act

Any other employee

Fully exempt

Minimum of the following 3 limits:

Minimum of the following 3 limits:

(1) Actual gratuity received, or

(2) 15 day's salary for every completed year, or part thereof exceeding six months (7 day's salary for each season for an employee in a seasonal establishment); or

(3)Rs. 20,00,000

(1) Actual gratuity received, or

(2) Half months average salary of each completed year of service.

(3) Rs.20,00,000

Meaning of Salary:

(i) Basic salary plus Dearness allowance.

(ii) Last drawn salary (average salary of the preceding three months in case of piece rated employee)

(iii) No. of days in a month to be taken as 26

Meaning of Salary:

(i) Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if a fixed percentage of turnover.

(ii) Average salary of last 10 months preceding the month in which event occurs.

(iii) Only completed a year of service is to be taken.

Taxability of Pension:

Uncommuted pension i.e. the periodical pension: It is fully taxable in the hands of all employees, whether government or non-government.

Commuted Pension: Exemption of commuted pension u/s 10(10A)

Govt. Employees

Any other employee

Fully exempt

(a) If gratuity is not received: The commuted value of 1/2 of pension which he is normally entitled to receive is exempt.

(b) If gratuity is also received: The commuted value of 1/3rd of pension which he is normally entitled to receive is exempt.

Voluntary Retirement Compensation (VRS) [Sec.10 (10C)]

Any compensation received or receivable from certain employers by the employee on voluntary retirement as per the guidelines of the Government is exempt to the extent minimum of the following limits:

Ø  Actual amount received

Ø  Rs. 5, 00,000 whichever is less.

The exemption shall be available, subject to the following conditions:

Ø  The compensation is received only at the time of voluntary retirement or termination of his services in accordance with any scheme or schemes of voluntary retirement or in the case of public sector Company, a scheme of voluntary separation. Even if the compensation is received in installments, the exemption shall be allowed.

Ø  The amount receivable on account of voluntary retirement or voluntary separation of the employee does not exceed: the amount equivalent to 3 months salary for each completed year of service; or Salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.

Retrenchment Compensation [Sec. 10(10B)]

Retrenchment compensation received by an assessee at the time of his retrenchment, shall be exempt to the least amount from the following:

(i) Actual amount received

(ii) An amount calculated in accordance with the provisions of section 256F(b) of the Industrial Disputes Act, 1947 which is equal to 15 days average pay for each completed year of continuous service or any part thereof in excess  of 6 months,  

(ii) Amount specified by the Central Government, i.e. Rs. 500,000

Approved Superannuation Fund [sec. 10 (13)]

The tax treatment as regards the contribution to and payment from the fund is as under:

Ø  Employee's contribution: Deduction is available under section 80C from gross total income.

Ø  Employer's contribution: Contribution by the employer to the approved superannuation fund is exempt up to Rs. 1, 00,000 per year per employee. If the contribution exceeds Rs. 1, 00,000 the balance shall be taxable in the hands of the employee.

Ø  Interest on accumulated balance: It is exempt from tax.

Any payment from an approved superannuation fund is exempt from tax if it is made on the following situations:

a)      on the death of a beneficiary to an employee

b)      In lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated before such retirement

c)       By way of refund of contribution on the death of a beneficiary

Leave encashment on retirement [sec. 10(10AA)]

Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of a period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in the case of other employees, the exemption is available subject to specified limits.

1. Leave encashed during service: fully taxable in which it is encashed

2. Leave encashed at the time of retirement

For govt. employee: fully exempted

For other employees: exempted up to a minimum of the following

Ø  Notified limit Rs. 3,00,000

Ø  Average salary x 10 months

Ø  Actual amount received

Ø  Average salary x no. of months leave due

Average salary = salary (Same as PF) for 10 months including the month of retirement / 10

Leave due is to be calculated taking one month leave or actual entitlement whichever is less