Income Tax on Retirement Benefits|Pension|Gratuity|Provident Fund|VRS|Leave Encashment | Taxpundit

In this video we will learn about the tax treatment of various retirement benefits. [1]. Leave Encashment : (A) Encashment of leave during the continuation of service : Leave encashment received during continuation of service by Government or nonGovernment employees…

Income Tax on Retirement Benefits|Pension|Gratuity|Provident Fund|VRS|Leave Encashment | Taxpundit

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In this video we will learn about the tax treatment of various retirement benefits.

[1]. Leave Encashment :

(A) Encashment of leave during the continuation of service :
Leave encashment received during continuation of service by Government or nonGovernment employees is charged to tax in the year of such encashment. However, relief under section 89 is available.
(B) Encashment of leave at the time of retirement :

Encashment of leave at the time of retirement can further be classified as :

(i) Tax treatment in the hands of Central Government or State Government employees:

In case of a Central Government or State Government employee, any amount received for encashment of accumulated leave at the time of retirement/superannuation is exempt from tax under section 10(10AA)(i).

(ii) Tax treatment in the hands of other employees:

In case of non-Government employees (i.e., other than the Central or the State Government employees), leave salary exempt from tax under section 10(10AA)(ii) will be least of the following:
1. Period of earned leave in months × Average monthly salary
2. Average monthly salary × 10 (i.e., 10 months’ average salary)
3. Maximum amount as specified by the Central Government i.e., Rs. 3,00,000
4. Leave encashment actually received at the time of retirement

[2] Gratuity :

Tax treatment of gratuity can be classified as follows:

(A) In case of a Government employee, any death-cum-retirement gratuity received is wholly exempt under section 10(10)(i). It should be noted that employees of statutory corporation will not fall under this category.

(B) Gratuity received by non-Government employees :

This category will further be classified as follows :

(1) Exemption in respect of gratuity in case of employees covered by the Payment of Gratuity Act, 1972.

(2) Exemption in respect of gratuity in case of employees not covered by the Payment of Gratuity Act, 1972.

3. [Pension] :

Pension can be in any of the following forms:

(a) Uncommuted pension is a periodic payment received after retirement.

(b) Commuted pension is a lump sum payment in lieu of periodic pension.

(c) An employee may (depending upon his service rules) partly commute his pension and receive the balance as periodic payments (i.e. uncommuted).

As per section 10(10A)(i), any commuted pension is exempt in the hands of a Government employee. In case of non-Government employee exemption in respect of commuted pension will be as follows :

 If the employee receives gratuity, one third of full value of commuted pension will be exempt from tax under section 10(10A)(ii)(a).

 If the employee does not receive gratuity, one half of full value of commuted pension will be exempt from tax under section 10(10A)(ii)(b).

4. [Compensation received at the time of voluntary retirement or separation]

is exempt from tax, if the following conditions are satisfied:

 Compensation is received by an employee of an undertaking specified in section 10(10C).

 Compensation is received in accordance with the scheme of voluntary retirement/separation, which is framed in accordance with prescribed guidelines. (for guidelines see Rule 2BA).

 Maximum amount of exemption is Rs. 5,00,000.

 Where exemption is allowed to an employee under section 10(10C) for any assessment year, no exemption under this section shall be allowed to him for any other assessment year.

 Relief under section 89 is admissible in respect of such amount.

 With effect from assessment year 2010-11, section 10(10C) has been amended to provide that where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under
section 10(10C) shall be allowed to him in relation to such, or any other assessment year.

5. [Payment from provident fund]

From taxation point of view provident funds can be classified as follows and Amount received at the time of termination of service is taxed as under :

 Statutory provident fund = Exempt

 Recognised provident fund = If certain conditions are satisfied, then lump sum amount is exempt from tax

 Un-recognised provident fund = Payment on termination will include four components, viz, employee’s contribution and interest thereon and employer’s contribution and interest thereon. The tax
treatment of such payments is as follows :

i. Employee’s contribution is not charged to tax; interest thereon is taxed under the head “Income from other sources”.
ii. Employer’s contribution as well as interest thereon will be taxable as salary income. However, relief under Section 89 will be available.

 Public provident fund = Exempt

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