Retirement Benefits

RETIREMENT BENEFITS
These benefits are provided by the employer to the employee for

his future, either while in service or on his retirement. These
have different tax treatment. They include:
a) Pension
Pension is a payment made by the employer after the retirement or
death of employee as a reward for past service. It is normally
paid as a periodical payment on monthly basis but certain
employers may allow an employee to forgo a portion of pension in
lieu of lump-sum amount. This is known as commutation of pension.
The treatment of these two kinds of pension is as under:
(i) Periodical pension (or Uncommuted pension).
It is fully taxable in the hands of all employee, whether
government or non-government.
(ii) Commuted pension
For employees of government organizations, local authorities and
statutory corporations, it is fully exempted from tax, hence not
included in gross salary.
For other employees, half of the total commuted value of pension
is exempted from tax. Any amount received over and above this
amount is taxable, so included in gross salary. If, however, the
employee is also receiving gratuity (another retirement benefit)
along with pension, then one third of the total commuted value of
pension is exempted from tax. Amount received in excess of this is
taxable, so included in gross salary.
Pension received by employee is taxable under the head
“Salaries”. However, family pension received by legal heirs
after death of employee is taxable under ‘Income from other
sources’.
b) Gratuity
Gratuity is the payment made by the employer to an employee in appreciation of

past services rendered by the employee. It is received by the employee on his
retirement. Gratuity is exempted upto certain limit depending upon the category of
employee. For the purpose of exemption, employees are divided into 3 categories:
(i) Government employees and employees of local authority:
In case of such employees, the entire amount of gratuity received by them is

exempted from tax. Nothing will be added to gross salary.
(ii) Employees covered under Payment of Gratuity Act, 1972:
In case of employees who are covered under Payment of Gratuity Act, the
minimum of the following amounts are exempted from tax:
1) Amount of gratuity actually received

2) 15 days of salary for every completed years of service or part thereof in
excess of six months. ( 15/26 x last month’s salary)
*Salary = Basic Salary + DA(Forming Part) + Commission
* For the purpose of calculation of complete year of service 6 months or
more shall be treated as a complete year. A period of less than 6 months
shall be ignored.
3) Rs.10, 00,000 (amount specified by government for those receiving
gratuity before 29-03-2018) or Rs. 20,00,000 (employees retiring after 29-
03-2018)
(iii) Other Employees:
In case of employees not falling in the above two categories, gratuity received
from the employers is exempt to the extent of minimum of following amounts:
1) Actual amount of gratuity received.

2) Half month average salary for every completed year of service (1/2 x
Average salary of last 10 months x Years of service).
3) Rs.10, 00,000 (amount specified by government for those receiving
gratuity before 29-03-2018) or Rs. 20,00,000 (employees retiring after 29-
03-2018) Salary here means basic salary + dearness allowance /
dearness pay (if terms of employment provide) + commission on
turnover or sales
c) Leave Salary
Employees are entitled to various types of leave. The leave generally can be taken
(casual leave/medical leave) or it lapses. Earned leave is a kind of leave which an
employee is said to have earned every year after working for some time. This leave
can either be availed every year, or get encashment for it. If leave is not availed or
encashed, it is allowed to be carried forward. This leave keeps getting accumulated
and is encashed by employee on his retirement. The tax treatment of leave
encashment is as under:
(i) Encashment of leave while in service. This is fully taxable and so is added to
gross salary.
(ii) Encashment of leave on retirement. For the purpose of exemption of

accumulated leave encashment, the employees are divided into two categories:
State or Central Government employees
Leave encashment received by government employees is fully exempt
from tax. Nothing is to be included in gross salary.
Other Employees
Leave encashment of accumulated leave at the time of retirement received
by other employees is exempted to the extent of minimum of out of the given 4: 1)

Amount specified by Central Government (3,00,000).
2) Average salary of last 10 months X 10
3) Average salary of last 10 months X Approved leaves in month not availed
during the service period.
4) Actual amount of leave salary received.
Leave entitlement is calculated on the basis of maximum 30 days leave every

year.
Salary here means basic salary + dearness allowance / dearness pay
(if terms of employment provide) + commission on turnover or sales
d) Provident Fund:
Provident Fund Scheme is a welfare scheme for the benefit of employees. Under
this scheme, certain amount is deducted by the employer from the employee’s
salary as his contribution to Provident Fund every month. The employer also
contributes certain percentage of the salary of the employee to the Fund. The
contributions are invested outside in securities. The interest earned on it is also
credited to the Provident Fund Account. At the time of retirement, the accumulated
balance is given to the employee. Tax treatment of provident fund depends upon
the type of provident fund being maintained by the employer. Employee’s
provident fund may be of the following 3 types:
(i) Statutory Provident Fund
This is set up under the provisions of Provident Fund Act, 1925 and is maintained
by Government and Semi-Government organizations, local authorities, Railways,
universities and recognized educational institutions.
(ii) Recognized Provident Fund
This is set up under the Employee’s Provident Fund and Miscellaneous Provisions
Act, 1952 (PF Act, 1952) and is maintained by private sector employers. The
establishments covered under PF Act, 1952 have two options; either to follow the
same scheme at by the Government under the PF Act or draft their own scheme of
PF but get recognition from Commissioner of Income Tax.
(iii) Unrecognized Provident Fund
If a provident fund is not recognized by the Commissioner of Income Tax, it is

known as unrecognized PF.
Besides the above mentioned 3 funds, a person can also become a member of
Public Provident Fund.
(iv) Public Provident Fund
The Central Government has established the Public Provident Fund for the benefits
of general public to mobilize personal savings. Any member of general public
(whether salaried or self employed) can participate in this fund by opening a
Provident Fund Account at the State Bank of India or its subsidiaries or other
nationalized banks. A salaried employee can simultaneously become member of
employees provident fund (whether statutory, recognized or unrecognized) and
public provident fund. Any amount may be deposited (subject to minimum of Rs.
500 and maximum of Rs.1,50,000 per annum) under this account. The accumulated
sum is repayable after 15 years. At present, it carries an interest rate of 8.5% per
annum which is credited every year but payable only the time of maturity.
Tax treatment of these provident funds (i.e. the exemption and deduction available
in respect of contributions to and payment from these funds) is summarized as
follows:
Salary here means basic salary + dearness allowance / dearness pay
(if terms of employment provide) + commission

Retirement Benefits

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RETIREMENT BENEFITS

These benefits are provided by the employer to the employee for

Gratuity is the payment made by the employer to an employee in appreciation of

(i) Government employees and employees of local authority:

In case of such employees, the entire amount of gratuity received by them is

(ii) Employees covered under Payment of Gratuity Act, 1972:

1) Amount of gratuity actually received

(iii) Other Employees:

1) Actual amount of gratuity received.

(ii) Encashment of leave on retirement. For the purpose of exemption of

State or Central Government employees

Leave encashment received by government employees is fully exempt

from tax. Nothing is to be included in gross salary.

Leave encashment of accumulated leave at the time of retirement received

by other employees is exempted to the extent of minimum of out of the given 4: 1)

2) Average salary of last 10 months X 10

3) Average salary of last 10 months X Approved leaves in month not availed

during the service period.

4) Actual amount of leave salary received.

Leave entitlement is calculated on the basis of maximum 30 days leave every

(i) Statutory Provident Fund

(ii) Recognized Provident Fund

(iii) Unrecognized Provident Fund

If a provident fund is not recognized by the Commissioner of Income Tax, it is

(iv) Public Provident Fund

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