Income tax on retirement benefits

Income tax on retirement benefits

Retirement marks the beginning of a new chapter in life. People rely on investment and savings they have made during their working life to enjoy this phase. Tax implication of income during the retirement years is an important aspect as it affects the actual cash flows.

The Income-Tax Act, 1961, provides higher tax slabs for senior citizens to ensure that their tax-liability is lower than others. For tax purposes, an individual who is 60 years old or more at any time during the financial year qualifies as a senior citizen. Any person who is 80 years or more qualifies as a very senior citizen.

 What are the tax slabs rates?


 

 The following incomes are generally received on retirement:

 Pension

Pension is a periodical allowance received by an employee after his retirement, on account of past service, given by a former employer.

Periodical pension received by an employee is taxable under the head 'Salaries' as 'profits in lieu of Salaries' as provided in section 17(3).

When a lump-sum payment is made in lieu of a periodical pension, it is termed as commuted pension.

Commuted pension is tax-free in case of government employees (Section 10(10A))

 Gratuity

Gratuity received by an employee of the central government, state government or any local authority is completely exempt from tax. (Section 10(10))

 Leave Encashment

In case of government employees, it is fully exempt from tax. ( Section 10(10AA))

 Voluntary Retirement Compensation

The benefits derived by an employee by opting VRS can also be considered as retirement benefit.

VRS is applicable to only those employees who have completed 10 years of . For income tax purposes, this compensation amount received is exempt up to Rs. 5,00,000/- if all the conditions under the scheme are fulfilled. (Sec. 10(10C))

Payment from Provident Fund

Any payment received from a Statutory Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. (Sec. 10(11), Sec.10(12))

Any payment from any other provident fund notified by the Central Govt. is also exempt. 

 Payment from Superannuation Fund

Payment from an Approved Superannuation Fund will be exempt provided the payment is made in the circumstances specified in the section viz. death, retirement and incapacitation. (Sec.10(13))

 

Conclusion:

On the death of a senior citizen, the pension received by the spouse is treated as income and taxed. However, the spouse is entitled to a deduction of R15,000 or one-third of the pension amount, whichever is less.