- Date : 15/02/2023
- Read: 5 mins
Taxation can affect your retirement benefits. Do you have to pay income tax on PF on retirement? Is gratuity taxable? Learn more.
Retirement Benefits (PF And Gratuity): Are They Taxable?
When you retire from your job, you receive retirement benefits. Some of the most common post-retirement benefits are provident fund, gratuity, superannuation fund, leave encashment, and others. Your retired life starts with the liquidation of these post-retirement benefits.
Previously, receiving a pension and other retirement benefits was tedious. They had to run from pillar to post to receive these benefits. However, online facilities have made the process easier and simpler. Once formalities are over, retired people can now receive retirement benefits directly to their bank accounts. This ensures that after retirement, you have a steady flow of income.
While calculating retirement benefits, most people need to consider the tax liability associated with them. If you don't pay your taxes, it may cause severe legal and financial complications. When calculating your benefits after retirement, you should always consider the taxes you have to pay at the time of retirement.
The taxations are different for all people because of the nature of their job or profession. A government employee can have different tax liabilities than a non-government worker. So, let's take a look.
- The provident fund receipts or gratuity you receive after retirement are tax-exempt if you are a government employee.
- If you are a non-government employee:
- Income Tax On Gratuity on Retirement: Gratuity is tax-exempt concerning the prescribed limits.
- Income Tax On PF on Retirement: Provident fund receipt is exempt from tax if you receive it from a recognised provident fund. The exemption limit varies according to income level. However, you should have provided at least 5 years of continuous service.
Post Retirement Benefits and Tax Treatment
Gratuity
An employer with ten or more employees in the previous twelve months has to pay gratuity to the employees during tenure. The gratuity act remains valid even if the number of employees is reduced after employing at least ten in the initial twelve months. Gratuity payment is made after retirement. However, in certain exceptions (such as the untimely death of the person before retirement), gratuity is paid to the legal heir.
You can receive a gratuity from your employer if you've completed 5 years of employment. Interns, freelancers, or temporary employees are not eligible for gratuity.
Now, the question comes, is gratuity taxable? Let’s explore.
The gratuity of a government employee is completely exempt from taxation.
The exemption limit for non-government employees (who come under the Payment of Gratuity Act) is the least of:
- Rs.20 lakhs, or
- (Number of years of Service) x (Last Drawn Salary) x 15/26, or
- Received gratuity
Exemption limits for employees not under the Gratuity Act is the least of:
- An amount equal to Rs. 10 lakhs, or
- (Number of years of Service Completed) x (Average salary of the last ten months before retirement) x ½ or
- Received gratuity
It needs special mention that the increased exemption limit from Rs. 10 lakhs to Rs. 20 lakh (as per the amendment on March 8, 2019) is applicable for employees who come under the Payment of Gratuity Act. It doesn't apply for employees who aren't covered by the Payment of Gratuity Act.
The full amount received from gratuity during employment years is taxable. Government (central/state) and local authority employees can get full gratuity exemption under Section 10(10) if gratuity is received after resignation or retirement.
In case a legal heir of a government employee receives gratuity, tax exemption is available on the full amount under section 10(10)(i). If you are a legal heir of a non-government employee under the Gratuity Act, the gratuity amount received is taxable.
Learn these retirement benefits and tax exemption limits if planning for retirement.
Pension
You can receive a pension in two groups:
- Commuted Pension: This type of pension is received in full amount once in a lump sum. It is not available on an instalment basis.
- Uncommuted Pension: You can receive it in instalments. This pension type is taxable whether you are a government employee or a non-government.
Tax exemption limits for government employees (both central and state government employees), as well as employees of local authorities and statutory corporations on commuted pensions, are given below:
- Half of 100% commuted pension value for employees who don’t receive gratuity
- One-third of 100% commuted pension value for employees who receive gratuity
- The separate calculation for each part of the pension for employees who receive a pension in different parts (both in terms of commuted and uncommuted pension)
No tax is levied if a family member receives a pension in a lump sum. However, in the case of an uncommuted pension, the tax exemption limit is lesser of either one-third of uncommuted pension or Rs. 15,000.
Retirement Benefits (PF And Gratuity): Are They Taxable?
When you retire from your job, you receive retirement benefits. Some of the most common post-retirement benefits are provident fund, gratuity, superannuation fund, leave encashment, and others. Your retired life starts with the liquidation of these post-retirement benefits.
Previously, receiving a pension and other retirement benefits was tedious. They had to run from pillar to post to receive these benefits. However, online facilities have made the process easier and simpler. Once formalities are over, retired people can now receive retirement benefits directly to their bank accounts. This ensures that after retirement, you have a steady flow of income.
While calculating retirement benefits, most people need to consider the tax liability associated with them. If you don't pay your taxes, it may cause severe legal and financial complications. When calculating your benefits after retirement, you should always consider the taxes you have to pay at the time of retirement.
The taxations are different for all people because of the nature of their job or profession. A government employee can have different tax liabilities than a non-government worker. So, let's take a look.
- The provident fund receipts or gratuity you receive after retirement are tax-exempt if you are a government employee.
- If you are a non-government employee:
- Income Tax On Gratuity on Retirement: Gratuity is tax-exempt concerning the prescribed limits.
- Income Tax On PF on Retirement: Provident fund receipt is exempt from tax if you receive it from a recognised provident fund. The exemption limit varies according to income level. However, you should have provided at least 5 years of continuous service.
Post Retirement Benefits and Tax Treatment
Gratuity
An employer with ten or more employees in the previous twelve months has to pay gratuity to the employees during tenure. The gratuity act remains valid even if the number of employees is reduced after employing at least ten in the initial twelve months. Gratuity payment is made after retirement. However, in certain exceptions (such as the untimely death of the person before retirement), gratuity is paid to the legal heir.
You can receive a gratuity from your employer if you've completed 5 years of employment. Interns, freelancers, or temporary employees are not eligible for gratuity.
Now, the question comes, is gratuity taxable? Let’s explore.
The gratuity of a government employee is completely exempt from taxation.
The exemption limit for non-government employees (who come under the Payment of Gratuity Act) is the least of:
- Rs.20 lakhs, or
- (Number of years of Service) x (Last Drawn Salary) x 15/26, or
- Received gratuity
Exemption limits for employees not under the Gratuity Act is the least of:
- An amount equal to Rs. 10 lakhs, or
- (Number of years of Service Completed) x (Average salary of the last ten months before retirement) x ½ or
- Received gratuity
It needs special mention that the increased exemption limit from Rs. 10 lakhs to Rs. 20 lakh (as per the amendment on March 8, 2019) is applicable for employees who come under the Payment of Gratuity Act. It doesn't apply for employees who aren't covered by the Payment of Gratuity Act.
The full amount received from gratuity during employment years is taxable. Government (central/state) and local authority employees can get full gratuity exemption under Section 10(10) if gratuity is received after resignation or retirement.
In case a legal heir of a government employee receives gratuity, tax exemption is available on the full amount under section 10(10)(i). If you are a legal heir of a non-government employee under the Gratuity Act, the gratuity amount received is taxable.
Learn these retirement benefits and tax exemption limits if planning for retirement.
Pension
You can receive a pension in two groups:
- Commuted Pension: This type of pension is received in full amount once in a lump sum. It is not available on an instalment basis.
- Uncommuted Pension: You can receive it in instalments. This pension type is taxable whether you are a government employee or a non-government.
Tax exemption limits for government employees (both central and state government employees), as well as employees of local authorities and statutory corporations on commuted pensions, are given below:
- Half of 100% commuted pension value for employees who don’t receive gratuity
- One-third of 100% commuted pension value for employees who receive gratuity
- The separate calculation for each part of the pension for employees who receive a pension in different parts (both in terms of commuted and uncommuted pension)
No tax is levied if a family member receives a pension in a lump sum. However, in the case of an uncommuted pension, the tax exemption limit is lesser of either one-third of uncommuted pension or Rs. 15,000.
