Income Tax on retirement benefits
Some of the retirement benefits are fully or partially exempt from tax.
- Pension is a periodical allowance received by an employee after his retirement, on account of past service, given by a former employer.
- Periodical pension received by an employee is taxable under the head 'Salaries' as 'profits in lieu of Salaries' as provided in section 17(3).
- When a lump-sum payment is made in lieu of a periodical pension, it is termed as commuted pension.
- Commuted pension is tax-free in case of government employees (Section 10(10A))
- Gratuity received by an employee of the central government, state government or any local authority is completely exempt from tax. (Section 10(10))
- In case of government employees, it is fully exempt from tax. ( Section 10(10AA))
Voluntary Retirement Compensation
- The benefits derived by an employee by opting VRS can also be considered as retirement benefit.
- VRS is applicable to only those employees who have completed 10 years of . For income tax purposes, this compensation amount received is exempt up to Rs. 5,00,000/- if all the conditions under the scheme are fulfilled. (Sec. 10(10C))
Payment from Provident Fund
- Any payment received from a Statutory Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. (Sec. 10(11), Sec.10(12))
- Any payment from any other provident fund notified by the Central Govt. is also exempt.
Payment from 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 incapacitation. (Sec.10(13))