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:-
15 days' salary = Salary last drawn x 15/26.
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.
For the purpose of Section 10(10AA), the term 'Superannuation or otherwise' covers resignation.
Retrenchment compensation received by a workman under the Industrial Dispute Act 1947 or any other Act or Rules is exempt subject to following limits:
Least of the following is exempt from tax:
Taxability of Contribution by Employer, Employee, Interest credited to various types of Provident Funds and payment received therefrom:
|Statutory Provident Fund||Recognised Provident Fund||Un-recognised Provident Fund||Public Provident Fund|
|Employer's contribution||Exempt||Exempt upto 12% of salary (#)||Exempt||Not Applicable|
|Benefit of deduction u/s 80C for Employee's contribution||Yes||Yes||No||Yes|
|Interest credited||Exempt||Exempt if rate of interest is upto 9.5%. Interest in excess of 9.5% is charged to tax.||Exempt||Exempt|
|Payment received at the time of retirement or termination of service||Exempt||If certain conditions are satisfied, then lump sum amount is exempt from tax (##)||(###)||Exempt from tax|
(#) Salary for this purpose will include the following :
(##) Accumulated balance from a recognised provident fund will be exempt from tax if following conditions are satisfied :
If accumulated balance includes amount transferred from other recognised provident fund, then the period for which the employee rendered service to such previous employer shall also be included in computing the aforesaid period of 5 years.
(###) Treatment of payment received from 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 :
Approved superannuation fund means superannuation fund which is approved by the Commissioner of Income-tax. With effect from assessment year 2010-11, employer's contribution to an approved superannuation fund in excess of ₹ 1,00,000 is charged to tax as perquisite.
Employee's contribution will qualify for deduction under section 80C and interest on accumulated balance is not liable to tax. Payments in following cases will be exempt from tax under section 10(13):
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In case of any doubt / clarification, please visit the official website of Income Tax Department.
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