Income Tax News: All Indian citizens are required to file annual income tax returns. Employee provident fund, pension, and gratuity taxes must be paid by retiring employees. Employers in India offer their staff members a range of retirement benefits. Employers in India most frequently provide pensions, the Employee Provident Fund (EPF), and the National Pension System (NPS) as retirement benefits. According to section 17, these benefits are taxed as “profits in lieu of salaries” under the “Salaries” heading.
Understanding the Taxability of Retirement Benefits
It should be mentioned that a number of variables, such as the kind of benefit, the amount received, and the tax status of the recipient, affect whether retirement benefits are taxable. This is a basic explanation of the taxation of retirement benefits.
Pension and Taxes
Pensions are earned by most senior citizens who are retired employees. Pensions are among the most significant retirement benefits that Indians can receive, particularly if they worked for the government. In India, pensions are paid out as a monthly allowance, a lump sum, or a combination of the two. Pensions are payments that employers make to former employees as a token of appreciation for their work after they retire or pass away. Two types of pensions exist:
- Commuted Pension: A pension commutation occurs when an employee receives a lump sum payment in place of giving up a portion of their monthly pension.
- Uncommuted Pension: The term “uncommuted pension” refers to a pension that is paid out periodically.
Unveiling the Dichotomy in Pension Benefits
It should be noted that employees of the government and non-government pay taxes in different ways. For government employees, the lump sum amount received at pension maturity (the time of retirement) is completely free from taxes. Conversely, non-government employees who receive a 100% pension less the gratuity amount will be required to pay taxes on 50% of the entire amount. Income tax is not applied to the remaining 50%. However, if the worker in the private sector receives a 100% pension, which includes the gratuity, then a third of the total amount is tax-free and the remaining portion is taxable.
Gratuity and Taxes
The amount that government employees receive as a gratuity upon retirement is completely free from taxes. There are two distinct taxation methods for employees who are not government employees. The following are the lowest amounts on which the exemption is applied for those covered by The Payment of Gratuity Act, 1972: The actual gratuity received, plus 15 days’ salary* for each year of employment with the company, equals Rs 20 lakh. In this instance, the salary is equal to the employee’s last salary drawn times the number of years they have worked there, or 15/26.
The exemption covers the lowest amount that is determined as long as the recipient is not covered by the Payment of Gratuity Act, of 1972. The actual gratuity amount, half a month’s salary* for each year of employment with the company, or Rs 10 lakh was received. The salary in this case is the mean of the preceding ten months’ salaries. The basic salary, dearness allowances, and performance-based incentives are all included in the salary amount.
Provident Fund and Taxes
The amount withdrawn from an employee provident fund (EPF) after retirement is tax-free. The remaining amount on the employee’s credit at the time of employment termination is tax-free, per the Income-tax (IT) Act. The employee’s earnings are exempt from tax if they have been with their employer (including previous employers if PF has been transferred) continuously for a period of five years or longer, or if their employment was terminated earlier for reasons such as poor health, the employer’s business contraction or discontinuance, or any other circumstance outside of their control.
Nevertheless, regardless of your entire EPF contribution history, the interest earned on the accumulated balance after employment retirement (i.e., the time when no contributions are made to the EPF) is taxable.
Leave Encashment Benefits
The new income tax system announced in the Union Budget 2023 will exempt the salaried class’s leave encashment benefits, which saw a rise in the maximum from Rs 3 lakh to Rs 25 lakh, from taxes. Even in their year of retirement, they are able to transition to the new system.
Filing ITR
In order to file income tax returns (ITR) for retirement benefits, it is necessary for individuals to gather all pertinent documentation, including Form 16 and pension statements. After that, they must calculate the tax due on their retirement benefits and submit their ITR.
A number of exemptions and deductions are available for retirement benefits, which when used can lower the tax burden. For instance, under the previous tax system, people were able to deduct up to Rs 1.5 lakh from their taxable income under Section 80C of the Income Tax Act.
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