What are Tax Liability on Retirement and Benefits ?

On retirement, an employee normally receives certain retirement benefits. Such benefits are taxable under the head ‘Salaries’ as “profits in lieu of Salaries” as provided in section 17(3). 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 are described below:

GRATUITY (Sec. 10(10)):

1. Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt.Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:-
   

• For every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned employee.
• The amount of gratuity as calculated above shall not exceed Rs.3,50,000(w.e.f.24.9.97).

1. In case of any other employee, gratuity received shall be exempt subject to the following limits:-

• Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service
• Rs.3.5 Lakhs whichever is less.

Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 3.5 Lakhs. As per Board’s letter F.No. 194/6/73-IT(A-1) dated 19.6.73, exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will quality for relief u/s 89(1). Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax (Circular No. 573 dated 21.8.90). Payment of Gratuity (Amendment) Bill, 2010 has proposed to increase the limit to Rs. 10,00,000.

COMMUTATION OF PENSION (SECTION 10(10A)):

1. In case of employees of Central & State Govt. Local Authority, Defence Services and Corporation established under Central or State Acts, the entire commuted value of pension is exempt.
2. In case of any other employee, if the employee receives gratuity, the commuted value of 1/3 of the pension is exempt, otherwise, the commuted value of ½ of the pension is exempt. Judges of S.C. & H.C. shall be entitled to exemption of commuted value upto ½ of the pension (Circular No. 623 dated 6.1.1992).
   

RETRENCHMENT COMPENSATION (Sec. 10(10B)):
Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947 or any other Act or Rules is exempt subject to following limits:-

1. Compensation calculated @ fifteen days average pay for every completed year of continuous service or part thereof in excess of 6 months.
2. The above is further subject to an overall limit of Rs.5,00,000 for retrenchment on or after 1.1.1997 (Notification No. 10969 dated 25.6.99).

Posted in: Age of Retirement,Minimum Tax Liability,Voluntary Retirement Scheme