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))

Leave Encashment

  • 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))



Fri, 26/07/2013 - 21:52


Dear sir

        I, Miss Mandira Barau, unmarried daughter of Late Rabindra Chandra Baraua, who was a Railway Employee, after his death on 10/09/2010 my mother got family pension and recently my mother late mrinalini Barau has died on 16/06/2013. 

     I, Miss Mnadira Barua is a State Government employee, want to know that shall I entile to get Family Pension as I am an unmarried daughter of my Deceased father.

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Abdul Wadud

Mon, 10/02/2014 - 10:19

I am a retired railway emploee, sir if i give some money from my pension, suppose 5 lakh, I will have to pay tax for these 5 lakh or not?