​​Retirement Benefits

Gratuity

An employer is liable to pay gratuity to an employee who has completed 5 years of continuous services and his employment with the employer terminates due to retirement, resignation, or superannuation. However, in case of death or disablement of the employee, the employer is liable to pay the gratuity even if the employee does not complete 5 years of service. The taxability of gratuity shall be as under:

Pension

Pension is a payment made by the employer after the retirement/death of the employee as a reward for past services. There are two kinds of pension:-

1. Commuted Pension - Commutation of pension means immediate payment of the lump-sum amount to an employee in lieu of surrender of a portion of the monthly pension. 
2. Uncommuted Pension - When the pension is paid on a periodical basis, it is called an uncommuted Pension.

The tax treatment of pension shall be as under:

Leave Encashment

Every entity provides leaves to the employees, which can be availed of by them in emergency situations or for vacations. If these leaves are not availed of by them, they may lapse or are encashed at the year-end or are carried forward to next year, as per the service rules of the employer. The accumulated leaves standing to the credit of an employee may be availed of by the employee during the tenure of employment or may be encashed at the time of retirement or resignation. When leaves are surrendered in lieu of monetary consideration, it is known as 'leave encashment'. The taxability of leave encashment shall be as under:

Voluntary Retirement Scheme

Voluntary retirement is an early retirement option given by an employer to its employees to take retirement before the decided age of retirement. To ensure social security for retiring employees, employers provide 'voluntary retirement compensation' to its employees. Such compensation is taxable in the hands of the employees as profit in lieu of salary. However, exemption under Section 10(10C) is allowed to the extent of lower of the following:

1. Compensation received; or
2. Rs. 500,000.
   
   The exemption is allowed subject to the following conditions:-

1. The voluntary retirement compensation is paid by the specified category of employer.
2. The scheme should be drawn to result in an overall reduction in the existing strength of the employees.
3. The employee has completed 10 years of service or completed 40 years of age. (This condition is not applicable in the case of employees of a Public Sector Company).
4. The vacancy caused by the voluntary retirement is not re-filled by any other new hiring. Moreover, the retiring employee must not be employed in any other company or concern of the same management.
5. The employee has not availed of any tax exemption in respect of voluntary retirement compensation in the past.
6. The amount of compensation does not exceed 3 months' salary for each completed year of service or salary for the remaining period of employment left before such retirement. 'Salary' for this purpose shall be the total of last drawn basic salary, dearness allowance (if forms part of salary for computing retirement benefits), and commission paid to the employee.
7. The scheme should apply to all employees, including workers and executives of a concern excluding directors of a company or a co-operative society.
8. Employee should not claim relief under Section 89 in respect of such compensation.

Retrenchment Compensation

Retrenchment Compensation received by a workman under the Industrial Dispute Act, 1947, or any other law for termination of his employment is exempt from tax up to Rs. 5,00,000. The taxability of retrenchment compensation is as follows:

Provident Fund

Employee's Provident Fund (EPF) is a retirement benefit scheme that's available to salaried employees. Contribution in EPF is made both by the employee and the employer. The contribution, earnings, and withdrawals from the EPF account are exempt from tax except in certain circumstances.

Tax treatment in respect of contributions made to and payments from various provident funds are summarized in the table given below:

National Pension System (NPS)

National Pension System (NPS) is a retirement savings scheme administered and regulated by Pension Fund Regulatory and Development Authority (PFRDA). Under the NPS, individual savings are pooled into a pension fund which is invested by PFRDA-regulated professional fund managers as per the approved investment guidelines into diversified portfolios comprising of government bonds, bills, corporate debentures, and shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made.

The tax treatment of the contribution made to the NPS, accumulation of return, and the amount withdrawn from the NPS are as follows:

[1] The excess contribution shall be taxable only if the aggregate amount of contribution made by the employer to the account of employee in a Recognised Provident Fund, National Pension Scheme and Superannuation Fund exceeds Rs. 7,50,000. In this situation, the excess amount so contributed is taxable as perquisite in the hands of employee.

Note: The benefit of additional deduction of upto Rs. 50,000 under section 80CCD(1B) is also available to sum deposited to the account of minor by parent or guardian (effective from AY 2026-27). Any partial withdrawal from NPS shall be exempt to the extent of 25% of amount of contributions made by the parent or guardian of minor.