Retirement Benefits Exempt Under Section 10

Retirement Income Taxation Exemption Under Section 10

Retirement benefits denote the amount paid to employee upon his death, retirement, resignation, retrenchment or any other mode of termination of services, by his employer or former employer.

Though it is a capital profit, these are made liable to tax by including them within the meaning of the terms "salary" or "profit in lieu of salary".

The various exemptions available under the Act is discussed hereinafter.

On this page:

  1. Gratuity Exemption
  2. Pension Exemption
  3. Leave Salary Exemption

Retirement benefits: Gratuity [section 10(10)]

Exemption is available to the following extent for Gratuity Received On Termination of Employment including Death, Incapacitation, Resignation or Retirement: -

Government Employees Fully Exempt
Seasonal Employees covered by Payment of Gratuity Act, 1972

Least of the following is exempt:

  • Rs.10,00,000/-
  • 7 / 26 x LDS x CYOS
  • Gratuity Received
Other Employees covered by Payment of Gratuity Act, 1972

Least of the following is exempt:

  • Rs.10,00,000/-
  • 15 / 26 x LDS x CYOS
  • Gratuity Received
Other Employees not Covered by the said Act

Least of the following is exempt:

  • Rs.3,50,000/-
  • 1 / 2 x LDS x CYOS
  • Gratuity Received

Note: -

Gratuity Received while in Service fully Taxable.

Government Employees refers to employees whose gratuity is received under: -

  1. the revised Pension Rules of the Central Government, or
  2. the Central Civil Services (Pension) Rules, 1972, or
  3. under any similar scheme applicable to: -
    1. the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules); or
    2. the members of the All-India Services, or
    3. the members of the civil services of a State or holders of civil posts under a State, or
    4. the employees of a local authority, or
    5. any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defence services.

Where retirement benefits as gratuity is received more than once, either from one employer or more than one employer, or either in the same previous year or over several previous years, then the total gratuity exemption cannot exceed the statutory limit applicable as on the date of his retirement or becoming incapacitated prior to such retirement or his death or whose employment is terminated on or after that date.

The following are the limits applicable to various periods: -

  1. from 24.09.1997 to 23.05.2010 - Rs.3,50,000 [Notification No.10772 dated 20.01.1999]
  2. from 24.05.2010 onwards - Rs.10,00,000 [Notification No.43/2010 dated 20.01.1999]

In the case of the Gratuity payment covered by Payment of Act: -

  1. LDS - last drawn salary means Basic Pay + Dearness Allowance, if terms of employment provide.

    • "wages" as per section 2(s) of the Payment of Gratuity Act, 1972, means "all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance" based on the rate of wages last drawn by the employee concerned.
    • However, as per first proviso to section 4 of the Payment of Gratuity Act, 1972, in the case of a piece-rated employee, "daily wages shall be computed on the average of the total wages received by him for a period of 3 months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account".

  2. CYOS - completed year of service means each completed year of service or part of the year in excess of 6 months.

In the case of the Gratuity payment Not covered by Payment of Act: -

  1. LDS - last drawn salary means Basic Pay + Dearness Allowance, if terms of employment provide + Commission as a Fixed Percentage on Turnover. Basic Pay should be taken as an average of last 10 months salary.

  2. CYOS - completed year of service means each completed year of service and part of the year is ignored.

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Retirement Benefits: Pension [section 10(10A) & 10(18)(i)]

Pension refers to an arrangement to provide the employee with an income when he is no longer earning a regular income from employment, i.e., post employment.

Such pensions are normally in the form of monthly or annual payments, i.e., Un-commuted Pension. However, at the option of the Employee, such monthly / annual pensions can be received in lump sum, either in one time or more than one time, i.e., Commutation of Pension.

There may be defined contributions both from the employer and employee to a fund in this regard.

Retirement Benefits Exemption is available to the following extent: -

Note: -

Notified Employees refer to an Individual who has been in the service of Central or State Government and has been awarded with: -

  1. Param Vir Chakra
  2. Maha Vir Chakra
  3. Vir Chakra
  4. Any other Gallantry Award Notified by Central Government under section 10(18)(i) - Refer Annexure C [vide Notification SO No.1048(E) dated 24.11.2000]

Government Employees refers to employees who receive payment in commutation of pension under: -

  1. the Civil Pension (Commutation) Rules of the Central Government, or
  2. under any similar scheme applicable to: -
    1. the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules); or
    2. the members of the All-India Services, or
    3. the members of the civil services of a State or holders of civil posts under a State, or
    4. the employees of a local authority, or
    5. the employees of a corporation established by a Central, State or Provincial Act.

In respect of payments of Pension other than out of Fund approved under section 10(23AAB), the Commuted Value [for the purposes of Retirement Benefits exemption under section 10(10A)(ii)] shall be determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality.

Total Commuted Pension refers to the pension which an employee is normally entitled to receive, i.e., if an employee receives Rs.6,00,000 on commutation of 60% of his pension, the Total Commuted Pension would be Rs.10,00,000, being the amount he is normally entitled to receive.

Notified Pension refers to a pension scheme notified by the Central Government, in accordance with, and subject to, provisions of the section 80CCD.

As per section 80CCD(3), where any amount standing to the credit of the assessee in his account referred to in section 80CCD(1), in respect of which a deduction has been allowed under that section 80CCD(1) or 80CCD(2), together with the amount accrued thereon, if any, is received by the assessee or his nominee, in whole or in part, in any previous year: -

  1. on account of closure or his opting out of the pension scheme referred to in section 80CCD(1); or
  2. as pension received from the annuity plan purchased or taken on such closure or opting out,

the whole of the such amount referred to in (a) or (b) shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received, and shall accordingly be charged to tax as income of that previous year.

As per Circular No.623 dated 06.01.1992, the Supreme Court and High Court Judges are eligible for exemption in respect of the Commuted Pension not exceeding one-half of the pension under section 10(10A)(ii).

Retirement Benefits Pension Wholly Exempt

  1. Commuted pension received by Government employees is fully exempt.

  2. Pension received by Notified employees [under section 10(18)(i)] is fully exempt.
  3. Commuted Pension received by Non Government employees out of Fund approved under section 10(23AAB)

Commuted Pension received by Non Government employees other than out of Fund approved under section 10(23AAB)

Commuted pension received by other employees receiving Gratuity also One-third of the total Commuted Pension is exempt.
Commuted pension received by other employees not receiving Gratuity Half of the Total Commuted Pension is Exempt.

Retirement Benefits Pension Wholly Taxable

  1. Un-Commuted pension received is Wholly taxable.

  2. Notified Pension is Wholly taxable.

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Retirement Benefits Taxation: Leave Salary [Section 10(10AA)]

"Leave Salary" refers to the amount received by an employee for surrendering his "eligible leave" to the Employer.

"Eligible Leave" refers to the number of days / months of leave an employee is eligible to avail from the employer without loss of pay based on the period of service rendered by him.

As per employers' rules, an employee is eligible for 45 days of leave for each completed year of service.

However, as per the Income-tax Rules, it is only 30 days for each completed year of service.

The Retirement Benefits exemption in respect of leave salary is to be computed by carrying out the following steps:

1. Calculate the leave to the credit of the employee as under: -

Completed year of service (Ignore Fraction) x 1month xxx
Less: Leave taken by the employee xxx
---
Leave to the credit of the employee xxx

2. Calculate the last drawn salary based on last 10 months average. Salary for this purpose means Basic Pay + Dearness Allowance, if terms of employment provide + Commission as a Fixed Percentage on Turnover. Basic Pay should be taken as an average of last 10 months salary.

Exemption available is as under: -

Retirement Benefits Leave Salary Wholly Exempt

  1. Retirement Benefits as Leave Salary Received by Government Employees on termination of Employment for any reason, or Amount received by Legal heirs on the death of Government employee is fully exempt.

  2. On death of the Any Employee is fully exempt. (Circular No. F.35/1/65-IT(B), dated 05.1..1965 and Circular No.309 dated 03.07.1981)

Retirement Benefits as Leave Salary is Received by other than Government Employees on termination of Employment for any reason then least of the following is exempt:-

  • Rs.3,00,000
  • 10 months salary
  • Cash equivalent of the leave to the credit of the employee
  • Actual leave salary received

Where leave salary is received more than once, either from more than one employer in the same previous year, or, over several previous years, then the total leave salary Retirement Benefits exemption cannot exceed the statutory limit, i.e., Rs.3,00,000/-.

Leave Salary Received while in Service is fully taxable.

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