Post-Retirement Benefits And Their Tax Calculations

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Published: 06th February 2017
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Retirement is an important event in the lives of almost all of the salaried employees. While they get excited about the post-retirement benefits that they are entitled to, managing them certainly becomes a cause of concern. Taxation is the most challenging aspect in the management of benefits that are received after retirement. It is absolutely necessary to distinguish between the ones that are exempted from taxes and those, which are taxable under the law. Also, there is a considerable difference in the way funds of a government employee are taxed and the manner in which employees of private sector are taxed. Given below are the common post-retirement benefits and their tax calculations:

Provident Fund: Recognized provident funds are completely tax-free, if they satisfy the conditions laid down by the prevailing laws. However, the interest and total amount paid with respect to the Employee Provident Fund (EPF) after retirement are not tax-free if the employer had been contributing more than 12 % of the employee's salary to the fund. An employee is required to have rendered service of 5 years or more on a continuous basis, in order to qualify for the tax exemptions.

Gratuity: In case of employees eligible for gratuity under Payment of Gratuity Act of 1972, the gratuity shall be paid for every completed year of service at the rate of 15 days' salary based on the last drawn salary. Post-retirement gratuity that the state and central government employees receive is exempted from tax. However, in case of other employees, the tax exemption for gratuity would be limited to an amount that equals to, or is less than INR 10,00,000/-.

Superannuation Fund: The superannuation amount received on retirement is exempt from tax, except under certain circumstances, such as, resignation from service. One-third of the total value of commuted pension in case of an employee receiving gratuity would be exempted from tax under Section 10(10A)(ii)(a). In case of employees not receiving gratuity, one-half of the total value of commuted pension would be exempted from tax under Section 10(10A)(ii)(b). The best way to avoid the taxes on the taxable amount is to purchase annuity related to State Annuity Fund (SAF), without any commutation.

Leave Encashment: Payment received by central and state government employees by the way of leave encashment at the time of their retirement is fully exempted from tax. In case of other employees, this exemption is limited to a maximum of 10 months of leave encashment, which is based on the average salary of last 10 months. The amount of leave encashment eligible for tax exemption is further subject to a limit of INR 3,00,000/-.

Investing the amount received as retirement benefits in schemes like Fixed Deposit and National Savings Certificate can be greatly beneficial to the retired employees in saving taxes. Tax Deducted at Source (TDS) is applicable on retirement benefits that are taxable according to the provisions of the Income Tax Act, 1961. In such cases, the retired employees have to show the amount received and deducted taxes in the income tax return filed in the year of receipt of retirement benefits.

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