Retirement Benefits and its Taxability

Employer’s retirement savings plan is an essential part of the employee’s future financial security. Every employee must know about the various retirement benefits that he would be getting from his employer and their tax implication as well. Employees should understand and monitor their retirement plans and benefits. Retirement benefits received by an employee are taxable under the head Salary.

Here’s mention some of the retirement benefits-
Pension Income- Pension is the income received by an employee after his retirement on account of his past service. Taxability of pension depends on whether it is periodic (monthly) or lump-sum. Pension received in periodic payment is called as uncommuted pension which is fully taxable in case of government and non-government employees.

When a lump-sum payment is made in lieu of a periodical pension, it is termed as commuted pension. It is exempted for government employees. In case of other employees, if that employee is also receiving gratuity, then 1/3rd of the commuted pension would be exempt from tax otherwise, half of the commuted pension will be exempt from tax. Family pension received by family members after the death of employee shall be chargeable in the hands of recipient under the head “other sources”. Deduction of Rs. 15,000 or 1/3rd of such pension, whichever is lower shall be allowed.

Gratuity- Gratuity is a lump-sum payment made by an employer for the appreciation of the services rendered by his employee. Gratuity received is exempt u/s 10(10) Gratuity received by a government employee is completely exempt from tax. For other employees, the least of the following is exempt from tax
• Amount actually received as gratuity,
• Half month’s average salary for each completed year of service, or
• Maximum limit of Rs. 10,00,000

Leave Encashment- Leave encashment is the payment for encashment of unused leave of an employee. Encashment of leave during the employment is fully taxable. At the time of retirement, leave encashment received by government employee is fully exempt from tax. When received by non-government employees, the least of the following is exempt:
• Leave encashment actually received,
• 10 months average salary,
• Earned leaves entitlement not exceeding 30 days for every completed year of service, or
• Maximum limit of Rs. 3,00,000

Voluntary Retirement Compensation- Benefits derived by an employee by opting Voluntary Retirement Scheme (VRS) can also be considered as retirement benefit.
VRS is availed by employees having age of 40 years & completing 10 years of service. The amount of exemption is the actual amount of compensation received or Rs. 5,00,000, whichever is lower. The exemption is available to an employee only once.
Retrenchment Compensation- Any compensation received at the time of retrenchment is exempt from tax to the extent of minimum of the following
• Amount actually received,
• Amount calculated based on 15 days average pay for every completed year of service or part thereof in excess of six months, or
• Maximum limit of Rs. 5,00,000

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