Tax Benefits after Retirement

TomorrowMakers ™

Tax Benefits after Retirement

07 December 2017
The law grants tax exemptions on retirement benefits like PF, pension, gratuity and other retirement benefits. Learn more about the applicable rules to avoid tax hassles in your retired life.

Retired life begins with liquidation of retirement benefits such as your Provident Fund, Gratuity, Superannuation fund, leave encashment etc.

These benefits, built over decades of disciplined savings, will be transferred into your bank account to help you enjoy the retired life without any financial worries. However, ignoring your tax liability on these benefits can lead to numerous legal and financial complications. Hence, read ahead for an overview of the tax rules applicable to the common retirement benefits.

1. Provident Fund

At the time of retirement, your Provident fund account will consist of your contributions, the contributions of all your employers, and the interest credited over the years. This entire corpus is tax free provided the following conditions are fulfilled:

  1. The PF account is either Statutory or Recognized or a Public PF account.
  2. You were in continuous service, either with one or multiple employers, for a period of at least five years. If you change jobs, then the PF account should be transferred to the new employer. If this is done, then the period of employment with the previous employer will be included when computing the period of five years of continuous service.

So, if you remain in service for at least five years for one or different employers and have any PF account other than an unrecognized one, then the entire PF account corpus will be exempt from tax when it is credited after your retirement.

2. Gratuity

Gratuity, for tax exemption purposes, is calculated as a proportion of your monthly salary multiplied by the total years of completed service. If you are covered under the Payment of Gratuity Act, then the last drawn salary is used for the calculation. If not covered, then the average salary based on the last ten months of service will be considered. The maximum amount exempt from tax is Rs. 10 lakhs.

If thebasic component of your monthly salary is Rs. 20,000 and your total years of service is 25 years, then the amount of gratuity exempt from tax will be calculated as below.

Salary for 15 out of 26 working days

Rs. 11,540 approx

Total years of completed service

25 years

Amount exempt from tax

Rs. 2,88,500

Related: 64% Indians Fear Not Being Able To Achieve Their Retirement Income Target

3. Superannuation

Any superannuation or pension policy obtained directly or through the employer will mature at the time of your retirement. The maturity amount is normally paid in the form of a partial lump sum payment with the balance invested in annuities for generating a fixed monthly or periodic income.

So, if the maturity amount is Rs. 1 crore, then you may get around Rs. 30-40 lakhs as a lump sum payment with the balance amount used to generate a fixed monthly income till your death. The lump sum payment is called the commuted pension. The amount invested in annuities is your uncommuted pension.

1/3rd of the commuted pension is exempt for those who have received gratuity from their employers. For others, the exemption limit is 50%.Income from the uncommuted pension will be taxable at applicable rates.

New Pension Scheme account holders can claim exemption on entire amount provided it is entirely used to purchase an annuity for generating a fixed income.

If you withdraw the maximum permissible 60% of the fund amount, then 40% of the withdrawal amount will be tax free.

4. Leave Encashment

Employers permit retiring employees to encash a fixed number of available paid leaves andholidays(Includes public as well as organization-specific holidays).The exemption amount will be either Rs. 3 lakhs or 10 months of leave encashment whichever is lower.

So, if you have five months leave available at the time of retirement and the ten months’ average of your salary is Rs. 50,000, then you can claim the lower of Rs. 2.5 lakhs (Rs. 50,000 x 5 months) or Rs. 3 lakhs i.e. Rs. 2.5 lakhs as exempt from tax.

Being aware of the taxability of your retirement benefits will ensure you can maximize savings and minimize legal and financial complications when beginning your retired life.



Budget 2018 - Changes in income tax slabs over the years [Infographic]

Budget 2018 - Changes in income tax slabs over the years [Infographic]

Changes in our tax structure impacts the country's economy. It is for this reason that these numbers are reviewed and sometimes, altered each year.

7 benefits of Aadhaar Card

7 benefits of Aadhaar Card

There is more to this simple but significant document. Here is how it makes your life easy.

Components of your salary and their tax benefits [Infographic]

Components of your salary and their tax benefits [Infographic]

Structuring the salary, including tax efficient components is what employers should look at to maximise the take home of their employees

GST 101: What India’s biggest tax reform means for you

GST 101: What India’s biggest tax reform means for you

The goods and services tax (GST Bill) and its impact on consumers explained in terms you will actually understand

How to plan your taxes [e-Book]

How to plan your taxes [e-Book]

A guide to help you plan your taxes wisely

How does insurance help you save tax?

How does insurance help you save tax?

Insurance is a great means to save tax. However, given the dynamic nature of tax rules on deduction of insurance premiums, one must keep oneself aware of the latest tax changes and rules so as to be mindful of the same while purchasing insurance, to get the best tax benefits that are available on such products.

Non 80C items that help you save tax

Non 80C items that help you save tax

As tax planning season comes around, you should be on the lookout for ways to save tax. But remember to look beyond section 80(C)!


We would love to hear from you!

Question, comment or concern? Our contact form is the best way to get in touch. We will respond to you within 5 working days.