Taxability Of Retirement Benefits

Taxability of Retirement Benefits

On retirement, an employee normally receives certain retirement benefits. Such benefits are taxable under the head ‘Salaries’. However, in respect of some of them, exemption from taxation is granted u/s 10 of the Income Tax Act, either wholly or partly. These exemptions ?differs in the hands of central government employees, state government employees and private employees. Benefits along with their exemptions are described below.

?Types of retirement benefits

1. Gratuity
2. Leave Encashment
3. Pension or Annuity Commuted pension Un-commuted pension
4. Retrenchment Compensation
5. Voluntary Retirement Scheme (?VRS?)
6. Provident Fund

?Gratuity?(Section 10(10))

An employer is liable to pay gratuity to an employee who has completed 5 years of continuous services and his employment with the employer terminates due to retirement, resignation, or superannuation. However, in case of death or disablement of the employee, the employer is liable to pay the gratuity even if the employee does not complete 5 years of service. The taxability of gratuity shall be as under:

1. Gratuity Received by Government Employees : Any death cum retirement gratuity is?fully exempt?u/s 10(10)(i)
2. Other Employees (Non-Government)Covered by Payment of Gratuity Act,1972: Any death cum retirement gratuity is exempt from tax to the extent of least of following Rs 20,00,000Actual Gratuity received.15 days salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months

Note: No of days per month to be taken as 26 days

1. Not covered by Payment of Gratuity Act, 1972: Any death cum retirement gratuity is exempt from tax to the extent of least of following Rs 20,00,000Actual Gratuity received Half month’s Salary (based on last 10 months average salary immediately preceding the month of retirement or death) for each completed year of service

Note 1: Gratuity received during the period of service is taxable.

Illustrations?

Mr. A retired on 28.7.2020 after completing 25 years and six months of service and received a gratuity of INR 15,00,000. During retirement, his salary was:

• Basic Salary: INR 40,000 p.m.
• Dearness Allowance: INR 15,000 p.m. (of which 60% is for retirement benefits)
• Commission: 1% of turnover (in the last 12 months, turnover was INR 1,20,00,000)
• Bonus: INR 30,000 p.a.

Computation of his taxable gratuity assuming:

(a) He is a Government employee.

Particulars

Amount (in INR)

Gratuity received at the time of retirement

15,00,000

Less: Exemption under section 10(10)(i) [fully exempt]

15,00,000

Taxable Gratuity

Nil

(b) He is a private sector employee and covered by the Payment of Gratuity Act 1972.

Particulars

Amount (in INR)

Gratuity received at the time of retirement

15,00,000

Less: Exemption under section 10(10)(ii) Least of the following: i) Statutory limit=?INR 20,00,000 ii) Gratuity received=?INR 15,00,000 iii) As per formula: (salary last drawn x number of years of employment x15/26) (40,000+9000) x 26 x15/26=?INR 7,35,000

7,35,000

Taxable Gratuity

7,62,500

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