< >

Home > Income Tax > Help Center > Retirement Benefits Last Updated: Feb 02nd 2023

Tax on Retirement Benefits

Generally, employees receive certain retirement benefits once they are retired from their service (employment). The amounts received at the time of retirement contains gratuity, leave encashment, commuted pension, annuity etc.

The taxation of retirement benefits differs in the hands of central government employees, state government employees and private employees. Also, there are certain exemptions provided by the Government in case of retirement benefits.

Employees receive retirement benefits in various forms

Types of retirement benefits

  1. Gratuity
  2. Leave Encashment
  3. Pension or Annuity
    1. Commuted pension
    2. Un-commuted pension
  4. Voluntary Retirement Scheme (VRS)

1. Gratuity (Section 10(10))

Gratuity is a voluntary payment made by an employer in appreciation of the services provided by the employee.

  1. Employees of Central Government/members of civil services/local authority employees: Any death cum retirement gratuity is fully exempt u/s 10(10)(i)
  2. Other Employees (Non-Government)
    1. Covered by Payment of Gratuity Act,1972: Any death cum retirement gratuity is exempt from tax to the extent of least of following
      • Rs 20,00,000
      • Actual Gratuity received
      • 15 days salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months

      Note: No of days per month to be taken as 26 days

    2. Not covered by Payment of Gratuity Act, 1972: Any death cum retirement gratuity is exempt from tax to the extent of least of following
      • Rs 20,00,000
      • Actual Gratuity received
      • Half month’s Salary (based on last 10 months average salary immediately preceding the month of retirement or death) for each completed year of service

      Note 1: Gratuity received during the period of service is taxable

      Note 2: Gratuity is available to the employees who has completed 5 years of employment

2. Leave Encashment (Section 10(10AA))

Generally employees are allowed leaves during the period of service. Employees may avail such leaves or the leaves may either lapse or accumulated for future or allowed to be encashed every year or at the time of retirement/termination. The payment received on account of encashment of unutilized leave is called Leave Encashment.

  1. Government Employees: Leave Encashment received at the time of retirement is fully exempt from tax
  2. Non-Government Employees: Leave Encashment received is exempt from tax to the extent of least of following
    • Rs 3,00,000
    • Actual Leave encashment received
    • 10 months average salary
    • Period of earned leave In months ( Leave allowed-leaven taken/30 days) * 10 months average salary

Note: Leave Encashment received during the period of service is taxable.

NEW   W.e.f 1 st April 2023, the exemption under Leave Encashment at the time of retirement for Non-Government employees is increased to Rs 25,00,000 from Rs 3,00,000.

3. Pension or Annuity

Pension is a periodic payment made by Government or a company or other employers to the employee in consideration of past service payable after his retirement

Pension is of 2 types i.e., Un commuted and Commuted Pension

  1. Un commuted Pension: It means pension received periodically. It is fully taxable in the hands of both Government and Non-Government employees.
  2. Commuted Pension: It means lumpsum amount taken by converting the future right to receive pension and receive the amount immediately
    1. Employees of the Central Govt/local authorities/statutory corporation/members of civil services/defence services: Any commuted pension received is fully exempt from tax
    2. Other employees: Any commuted pension received is exempt from tax in the following way
      • If the employee is in the receipt of Gratuity, Exemption is 1/3*commuted pension received/commutation% *100%)
      • If the employee is not in the receipt of Gratuity, Exemption is 1/2*commuted pension received/commutation% *100%)

4. Voluntary Retirement Scheme ( VRS )

Lumpsum Payment or otherwise received by an employee at the time of voluntary retirement is taxable.

Exemption of maximum Rs 5,00,000 is applicable only if the amount is received from the employers of Public sector company, any other company, local authority, cooperative society, IIT, State Government, Central Government.

Our Tax Services

Online Income Tax Filing Time: ~7 mins
  • Comprehensive & Accurate > No limits.
  • Highly Secure > Peace of mind.
  • Maximum Deductions > Save on Taxes.
  • No more visits to Tax Consultants > Save Time & Money.
  • Real-time Tax Calculation
  • Available in both Web Browser & Mobile App

Start Now

GST Accounting Software Price: FREE for 1st year in India  refer pricing for other countries such as India, Australia, Malaysia, Nepal, Pakistan, Singapore, Sri Lanka, & UK

Easiest GST ready Accounting software

  • GST Compliant Invoicing
  • Online - Highly available
  • Quick Onboarding - Import your data from legacy
  • Personalization - Highly customized Invoicing
  • Drafts > Estimates > POs > Delivery Challans > Invoices > CR/DR Notes > RCs & All.
  • Barcode scanner Integration
  • Amazon, Flipkart Imports
  • Individual, or Bulk Payments - just a Click away
  • Multiple users can Book / Bill at the same time
  • Quick Invoicing, Auto Delivery, & Reminders
  • Multi-Channel GST returns preparation
  • Customized for Regular and Composition
  • AI Data Insights
  • AI Prioritization
  • AI Alerts
  • Expenses & Purchases
  • Real Time P & L
  • Barcode Scanner, e-Way Bill Integration
  • Excellent User Experience
  • Easy to understand language
  • Artificial Intelligence enablement
  • above all, Count on our Outstanding Client Service

Start NowLearn more
Tax Expert Services Price: Rs.799 onwards

  • Affordable Tax Services for Businesses, Associations, Individuals
  • GST Registration
  • GST Return Filing
  • GST Accounting
  • GST Consultation
  • Notice Handling
Income Tax
  • Income Tax Return Filing for Businesses, Associations, Individuals
  • Tax Savings
  • TDS Preparation
  • General Tax Compliance
  • Investment Advisory
  • Capital Gains Consultation
  • Tax Planning
  • Notice Handling
Virtual Accounting
  • Complete Accounting for Businesses, Associations, Individuals
  • Compliance & Accounting Portal Access for easy monitoring
  • Accounting Advisory
  • Tax Savings
  • GST, Income Tax, TDS, General Tax Compliance
  • Business Planning

Contact Now   WhatsApp Now

How to get help from