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 [Section 10(10)]:
Any death cum retirement gratuity received by Central and State Govt. employees, Defense 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 paid at the rate of fifteen days wages based on the rate of wages 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).
In case of any other employee, gratuity received shall be exempt, subject to the following exemptions
Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service or 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.
The 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.
Commutation of Pension [Section 10(10A)]:
In case of employees of Central & State Govt., Local Authority, Defense Services and corporations established under Central or State Acts, the entire commuted value of pension is exempt.
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.
Note:
Where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax shall not exceed the limit i.e. Rs.
350000/-.
Where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included
in the total income of the assessee of such previous year or years, the aggregate amount exempt from income-tax shall not exceed the limit of Rs. 350000/-.
Leave Encashment [Section 10(10AA)]:
Leave Encashment during service is fully taxable in all cases, relief u/s 89(1), if applicable, may be claimed for the same.
Payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.
In case of other employees, the exemption is to be limited to a maximum of 10 months of leave encashment, based on last 10 months average salary. This is further subject to a limit of Rs. 3,00,000/-.
Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.
Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under sub-clause 42 shall not exceed the specified limit i.e. Rs. 300000/-.
For the purpose of Section 10(10AA), the term ‘Superannuation or otherwise’ covers resignation.
Retrenchment Compensation (Sec. 10(10B):
Retrenchment compensation received by a workman under the Industrial Dispute Act 1947 or any other Act or Rules is exempt subject to following limits:
Compensation calculated @ fifteen days average pay for every completed year of continuous service or part there of in excess of 6 months.
The above is further subject to an overall limit of Rs. 5,00,000/- for retrenchment on or after 1.1.1997.
Compensation on Voluntary Retirement or ‘Golden Handshake'’ [Sec. 10(10C)]:
Payment received by an employee of the following at the time of voluntary retirement, or termination of service is exempt to the extent of Rs. 5 Lakh:
Public Sector Company.
Any other company.
Authority establishment under State, Central or provincial Act.
Local Authority.
Co-operative Societies, Universities, IITs and Notified Institutes of Management.
Any State Government or the Central Government.
The voluntary retirement Scheme under which the payment is being made must be framed in accordance with the guidelines prescribed in Rule 2BA of Income Tax Rules. In case of a company other than a
public sector company and a co-operative society, such scheme must be approved by the Chief Commissioner/ Director General of Income-tax. However, such approval is not necessary from A.Y. 2001-2002
onwards.
Where exemption has been allowed under above section for any assessment year, no exemption shall be allowed in relation to any other assessment year.
Payment from Provident Fund [Sec. 10(11), Sec.10(12)]:
Any payment received from a Statutory Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. Any payment from any other provident fund notified by the Central Govt. is
also exempt. The Public Provident Fund (PPF) established under the PPF Scheme, 1968 has been notified for this purpose. Besides the above, the accumulated balance due and becoming payable to an
employee participating in a Recognised Provident Fund is also exempt to the extent provided in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act.
Payment from Superannuation Fund [Sec.10(13)]:
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.
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Income Tax Department.
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