Are Retirement Benefits Taxable in Income Tax?

The Income Tax Act, 1961 makes it mandatory for income earned from employment, whether salary or otherwise, to be taxed. If you’re on the verge of retirement, you need to consider how to manage your retirement benefits. Consulting an investment advisor is certainly a good bet. However, it also helps to do your own homework to avoid being clubbed in the high tax bracket as you near retirement.Pensions, gratuity, provident fund payments, Voluntary Retirement Scheme (VRS), leave encashment and Dearness Allowance (DA) comprise the retirement benefits under Indian labour laws. Depending on the tax slab you fall under, you may have to be anywhere between 5% and 30% tax on lump sum payouts after retirement.Here are a few retirement benefits that are taxable:

Pension is taxable under the provisions of the law. However, if you opt to forgo all or a part of your pension in exchange for a lump sum amount, you are exempted from tax if you’re a government employee. If you work for the private sector, up to one third of your pension is exempted from tax.

Upon completion of 5 years of service, a salaried employee is eligible for gratuity. It is tax free for government employees. For private sector employees, gratuity is tax exempt in the following cases:
If the accrued amount of gratuity exceeds Rs.10 lakh, it is tax deductible.15 days salary for each year of service may be exempted.The actual amount of gratuity.

Provident Fund (PF) returns are completely tax free. However, if your employer invests in a privately held pension scheme, then tax benefits may be denied. In addition, the employer’s contribution and interest credited are taxed. In the case of Employee Provident Fund (EPF), if the employer’s contribution is greater than the stipulated 12%, the interest and lump sum payment are taxable.

Voluntary Retirement Scheme (VRS) is tax free if the amount received is less than Rs 5 lakh or the last three months average salary multiplied by the number of years of service. A key point to remember is that VRS is applicable only if you have completed a minimum of 10 years of service or are more than 40 years of age.To reduce your tax liability, you can opt for staggered payments over a few years so that tax payable in smaller increments.

If you’re an employee of the Central Government of India, you are eligible for Dearness Relief (DR) allowance which is paid as a component of pension. It is fully taxable.

Retirement income is income offered to a person based on the services rendered to his/her employer. Typically, many individuals are paid pensions after retirement for the services they provide to their employer. This income is assessed as a part of income tax under the head ‘Salaries’. Thus, the income is taxed as per the income tax slab rates and age of the individual.

Tax Rates for Citizens below the Age of 60

Here are the tax rates for people who earn a pension and are below 60 years of age-

Tax Rates for Citizens Between the Age of 60-80

Here are the tax rates for people who earn a pension and are between 60-80 years of age-

Tax Rates for Citizens Above the Age of 80

Here are the tax rates for people who earn a pension and are above the age of 80-

Here are a few retirement benefits that are exempted from tax-

Death cum Retirement Gratuity

The exemption amount varies based on employment type. Below are the tax exemptions depending on employment type-

• Central Government, State Government, and Local AuthorityThe gratuity earned by the central or state government or local authority employees will be exempt from tax entirely under the Gratuity Act, 1972.
• Employees Covered Under Payment of Gratuity Act, 1972 In case of such employees, the gratuity payment received will be exempted from tax until it doesn’t exceed the amount calculated according to the provisions of the Payment of Gratuity Act, 1972. For employees who haven’t worked for the government but are covered under the Payment of Gratuity Act, 1972, the least of the below will be exempted-15 days' salary for every service year.Rs. 20,00,000.Actual gratuity received.
• Other Non-Government EmployeesFor non-government employees not covered under the Payment of Gratuity Act, 1972, the least of the below will be exempted from tax-Actual gratuity received.Rs. 20,00,000.Half month’s average salary for every service year.

Commuted Pension

Commuted pensions can be given to central government employees, state government employees, local authority employees, and non-government employees. The pension provided to government and local authority employees doesn’t fall under the purview of taxation. But non-government employees will receive any of the below exemptions-

• In case the employee is offered gratuity, then 1/3rdof the total pension value.
• In case the employee isn’t offered gratuity, then half of the total pension value.

Leave Salary Encashment

Employees who don’t use eligible leaves can be provided with leave encashment .This benefit is offered to central government employees, state government employees, and other employees. The entire leave salary will be exempted from tax for central and state government employees. But for other employees, the least of the below will be exempted-

• Amount of leave encashment received.
• A stipulated amount of Rs. 3,00,000.
• Leave salary credit for the duration of earned leave when the employee retires.
• The average salary for the last 10 months.

Here are the steps you need to follow to report pension in ITR-

• In the ITR, choose the ‘Pensioners’ option under the ‘Nature of Employment’ field.
• Pension taxable as ‘salary’ needs to be mentioned. The taxpayer needs to mention the name, tax collection account number (TAN) of the employer, etc.
• Any amount that is excess needs to be reported under ‘Salary under Section 17(1)’ as ‘Annuity Pension’ .
• The commuted pension that is exempted from tax must be entered under the ‘Nature of Exempt Income’ in the field ‘Any Other’. Mention the amount of commuted pension and details in ‘Description’.

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.