Know all about Superannuation - Tax Laws - Retirement Dues


Every month lakhs of employees are retiring from Government, PSU and Private Sector after putting in more than 35 or even more years in service. During the last year of service when the superannuation date comes nearer everybody starts thinking about as what he/she will get on retirement in addition to Pension net of Income Tax. Here is a Guide for Common Man.

Are you due for retirement in the near future? During the last year of service when the superannuation date comes nearer, everybody starts thinking about what he/she will get on retirement in addition to Pension and is worried about Income Tax to be deducted out of the superannuation benefits. If proper homework is not done one is left high and dry at the last moment. Here is a Guide for the common man -

Gratuity

As per the HR Policies of any organization Gratuity is payable under the Gratuity Act. Gratuity is fully exempted from Income Tax up to a limit of Rs.10 lacs. Gratuity is payable to employees who have served for a minimum period of 5 years. Earlier payment of gratuity was limited to Rs.3.50 lacs only and through Payment of Gratuity (Amendment) Bill 2010 the limit was increased to Rs.10.00 lacs.

Leave Encashment on Retirement

Leave encashment on retirement is exempted from Income Tax up to Rs.3.00 lacs on retirements on or after 01-04-1998. Beyond Rs.3.00 lacs the leave encashment is taxable in the same way as Salary received during the financial year.

Monthly Pension

Monthly Pension received after retirement will also be taxable but the additional benefits will be available as applicable to senior citizens under the Income Tax Act. Females, Senior Citizens over and above 60 years to 80 years of age and Very Senior citizens beyond 80 years draw different tax exemptions.

Commuted Pension

Commuted Pension is the lump sum payment of pension where a prospective retiree can opt for lump sum payment by foregoing a part of the basic pension. Ordinarily one can commute 1/3rd of his/her basic pension as a lump sum payment which is restored after 15 years. Keeping in view the average life span in India, one must get his/her pension commuted to the extent permissible as the option can be exercised prior to retiring and after retirement it may require medical fitness and the procedure may be cumbersome. Commuted Pension is restored after 15 years from the date of start of pension and during the 15 years period Dearness Allowance is payable on Full amount of Basic Pension without commutation. It is advisable to opt for commuted pension as it will yield more interest at Bank rats as compared to amount of basis pension commuted by a retiree.

Commuted Pension Payable in Lump Sum - Fully Exempted from Tax

1/3rd of Monthly Basic Pay (Average of Basic Pay on which PF is deducted during the last 10 months of service) = Rs. X-00
Conversion Factor as per Chart Below = Rs. Y-00

Then Commuted Pension = 12 x (X) x (Y) where 12 in number of months in a year.

Conversion Factor

  • Conversion Factor decreases with the age at the time of retirement.

  • This conversion factor is never changed by the Government since 1971 when it came into being by taking interest @4.75 per annum.
  • If one takes VRS at younger age then higher commuted pension is payable as the Factor will be higher as per table below:


  • Commutation Table


    Attachments

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    Comments

    Author: Neha25 Feb 2013 Member Level: Bronze   Points : 0

    While the article is very useful, the commutation table and the added information about conversion factor are mind blowing. Keep it up.

    Author: Nipeksha25 Feb 2013 Member Level: Bronze   Points : 0

    I know persons residing in India who have retired from World Bank or United Nations Organization and pension payable to them is fully exempted from Tax. Why it is not so for all the employees?

    Author: Ashok Goyal25 Feb 2013 Member Level: Gold   Points : 0

    Nipeksha ,

    Law is law. It is for the law or policymakers to bring about uniformity in laws.

    Author: Venkiteswaran25 Feb 2013 Member Level: Diamond   Points : 3

    A nice attempt for a layman. Generally employees who would have put so much service will have a general knowledge on this regard. Nowadays, most organisations give a pre-retirement counselling session in which all these are included, apart from the ways of investment and post-retirement life to prevent stress and desperation.

    The commutation of pension is actually an advance payment(to be repaid back) and hence it is not an income.

    Author: dolly07 Dec 2013 Member Level: Silver   Points : 3

    This is a nice article on tax laws on retirement benefits.Here i want to add one more point. At the time of retirement, a employee also gets amount from provident fund in which at the time of employment, he contributed some part of salary and some amount is contributed by employer. If provident fund is:-
    1.Recognised Provident Fund
    2. Statutory Provident Fund
    3. Public Provident Fund
    Then all the amount received from P.F is fully exempt.
    But if it is an Unrecognised provident Fund. Then employer's part from the amount received will be taxable.

    Guest Author: Vinay Gupta23 Nov 2014

    Is commuted pension amount taxable?

    Author: Ashok Goyal25 Nov 2014 Member Level: Gold   Points : 4

    Dear Guest Author,

    You will be glad to know that commuted pension is not taxable at all and everybody must opt for the commuted pension as commuted pension is part of your monthly basic pension paid to you in advance for next 15 years that is upto the age of 73 or 75 if anybody retires at 58 or 60 years. If the pensioner does not survive up to 73 or 75 years the commuted pension paid in advance can not be recovered. But if the pensioner survives then the part of the basic pension commuted is added back at the age of 73 or 75 as the case may be.

    Guest Author: Sankaransbi13 May 2015

    Very informative!

    Author: Kailash Kumar11 Jun 2015 Member Level: Platinum   Points : 3

    Read the article and found to be very informative and useful. The author may consider writing an article about tax planning after retirement as it pinches more to pay tax after retirement. More over having worked in a bank the author is likely to have practical knowledge about practices adopted by retired persons for saving tax.

    Author: Ashok Goyal12 Jun 2015 Member Level: Gold   Points : 2

    @Kailash Kumar, Thanks for liking the article. I will be coming with article on tax planning by senior and super senior citizens after retirement. Can you come out with broad points to be covered in the article.

    Author: Kailash Kumar12 Jun 2015 Member Level: Platinum   Points : 3

    I have a hunch that the retired people are not adhering strictly to the income tax norms and tend to evade tax by opening many accounts in different banks and different branches of same bank presuming that after getting 10% tax deducted their responsibility is over. Perhaps there is some leniency too on the part of Government in random selection of cases for scrutiny.
    Now with the introduction of provision of mentioning all active accounts in ITR, how the scenario is going to be effected.

    Author: Ashok Goyal12 Jun 2015 Member Level: Gold   Points : 3

    @Kailash Kumar, With the introduction of UCIC that is Uniform Customer Identification Code by the RBI - all tax evaders whether retirees or otherwise will be caught as no individual will have more than one Customer ID in the banking system as a whole. All customer ID's will be cllubed and whole banking system will work as one bank. Due to lack of political will the Government could not force the banks to implement UCIC guidelines whose deadline was fixed on 31st March 2013 and extended time and again.



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