Income Tax on retirement benefits
Some of the retirement benefits are fully or partially exempt from tax.
Pension
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Pension is a periodical allowance received by an employee after his retirement, on account of past service, given by a former employer.
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Periodical pension received by an employee is taxable under the head 'Salaries' as 'profits in lieu of Salaries' as provided in section 17(3).
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When a lump-sum payment is made in lieu of a periodical pension, it is termed as commuted pension.
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Commuted pension is tax-free in case of government employees (Section 10(10A))
Gratuity
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Gratuity received by an employee of the central government, state government or any local authority is completely exempt from tax. (Section 10(10))
Leave Encashment
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In case of government employees, it is fully exempt from tax. ( Section 10(10AA))
Voluntary Retirement Compensation
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The benefits derived by an employee by opting VRS can also be considered as retirement benefit.
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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
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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))
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Any payment from any other provident fund notified by the Central Govt. is also exempt.
Payment from Superannuation Fund
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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))