Introduction: On the event of retirement, an employee receives certain retirement benefits which are dealt within the ambit of section 17(3) and considered as “profits in lieu of salary”, however section 10 allows certain exemptions on some of the retirement benefits, as stated below:
Section 10(10) Gratuity
i. Any death cum retirement gratuity received by the employee of the Central Government, State Government, Defence and Local authority shall be fully exempt.
ii. Any gratuity received under the provisions of Payment of Gratuity Act, 1972 shall be exempt subject to certain conditions :
a. Gratuity shall be exempt to the extent of fifteen days salary for every completed year of service or part thereof on the basis of the last salary drawn by the concerned employee.
b. The amount of gratuity as calculated shall not exceed Rs. 20 lakhs.
iii. In case of any other employee not covered above, the gratuity received shall be exempt to the extent of :
a. Half months salary based on the last 10 months average salary for each completed year of service
b. Rs. 10 Lakhs
Which ever is less.
Where in any case the gratuity was received in any one or more earlier years also, and the exemption was claimed on same, the amount of gratuity exemption will be reduced by the amount of exemption already claimed as the overall limit is Rs. 10 lakhs.
The gratuity received in the event of resignation or termination of employment shall also qualify for exemption and the taxable portion of gratuity will be qualified for relief under section 89(1).
As per the Circular no. 573 dated 21.08.1990, any gratuity received by a widow or legal heirs of the employee who died in active service shall be exempt from income tax.
Section 10(10A) Commuted Pension
i. Any commuted pension received by the employee of the Central Government, State Government, Defence, Local authority and corporation established under Central or State Acts shall be fully exempt.
ii. In case of any other employee, if the employee also received gratuity, then an amount equal to 1/3rd of the commuted amount of pension shall be exempt from income tax otherwise 1/2 of the commuted pension will be exempt.
Note: Judges of H.C and Supreme Court are entitled for 1/2 exemption of pension.
Section 10(10AA) Leave Encashment
i. Leave Encashment received during the service shall be fully taxable in the hands of the employee in all cases , relief can be claimed under section 89(1) if applicable.
ii. Any amount received as leave encashment at the time of retirement by the employees of the Central Government or State Government on account of leave earned at credit shall be fully exempt.
iii. In case of other employees the exemption shall be available to the extent of least of the following:
a. Cash as equilant to the leave at credit
b. 10 Months average salary
c. Leave encashment received
d. Rs. 3,00,000/-
It is to be noted here that any leave encashment received by the legal heirs of the deceased employee with respect to the privileged leave standing to the credit of that employee.
For the purpose of section 10(10AA), superannuation shall also include the resignation.
Section 10(10B) Retrenchment Compensation
i. Any Retrenchment compensation received under the Industrial Disputes Act, 1947 or any other Act or rules shall be exempt to the extent of least of the following:
a. Compensation to the extent of fifteen days average salary for every completed year of service or part there of in excess of 6 months.
b. Rs. 5,00,000/-
Section 10(10C) Voluntary Retirement or Golden Hand Shake
i. Voluntary Retirement compensation received by the employees of public sector company, any other company, any authority established under the State, Central or Provincial Act, local authority, co-operative societies, universities, IITs and notified institutes of management and State and Government employee is exempt to the extent of Rs. 5 lakh Rupees
ii. In case of exemption allowed for any assessment year under the above section, no exemption shall be allowed for any other assessment year, further it is to be noted that if any relief under section 89 has been claimed in this regard, no exemption under the above mentioned section will be allowed for any assessment year.
Section 10(11) and Section 10(12)n Provident Fund
Any amount received from a recognised provident fund is fully exempt. Besides this, pf received by an employee participating in a recognised provident fund shall be exempt subject to certain conditions:
i. If the amount of pf doesn’t exceed Rs. 50,000 it will be exempt
ii. If the amount of pf exceeds Rs. 50,000 and the employee was in continues service for 5 years or more the amount of pf will be exempt.
Section(13) Payment from Approved Superannuation Fund
Payment received with respect to approved superannuation fund will be exempt provided the payment has been made on the event of death, retirement or incapacitation.