How much Gratuity, Voluntary Retirement and Commuted Pension is Exempted from Income Tax?

Where retirement benefits as gratuity is received more than once, either from one employer or more than one employer, or either in the same previous year or over several previous years, then the total gratuity exemption cannot exceed the statutory limit applicable as on the date of his retirement or becoming incapacitated prior to such retirement or his death or whose employment is terminated on or after that date.

Pension refers to an arrangement to provide the employee with an income when he is no longer earning a regular income from employment, i.e., post employment.

Such pensions are normally in the form of monthly or annual payments, i.e., Un-commuted Pension. However, at the option of the Employee, such monthly / annual pensions can be received in lump sum, either in one time or more than one time, i.e., Commutation of Pension.

Gratuity :

GRATUITY – SECTION 10(10)
a) Any Death-cum-Retirement gratuity to Govt. Employees : Wholly exempt.

b) Any gratuity received by the employees covered under Payment of Gratuity Act, 1972. Least of the following is exempt:-

• 15 days salary (7 days in case of seasonal employment) for each completed year of service or part in excess of 6 months.
• Rs. 3,50,000.
• Amount of gratuity actually received

c) Any other gratuity, (not covered under (a) or (b)): Least of the followings is exempt:-

• Rs 3,50,000
• Half month’s salary for each completed year of service
• Amount of gratuity actually received.

Voluntary Retirement :

PAYMENT RECEIVED ON VOLUNTARY RETIREMENT SECTION 10 (10C):

Any amount received by an employee of a Public Sector Company or of any other company at the time of voluntary retirement is exempt to the extent such amount does not exceed Rs. 5 lacs, provided the scheme of such voluntary retirement is in accordance with the guidelines prescribed under rule 2BA of Income Tax Rules 1962. If an exemption has been allowed under this section for any assessment year, no exemption there under is allowable in relation to any other assessment year. Further, the benefit of the exemption has been extended to employees of an authority established under a Central, State or Provincial Act, or a local authority or to employees of a Co-operative society, university, Indian institute of Technology and notified Institute of Management.

Commuted Pension :

A) Government Employees : Wholly exempt.

B) Non-Govt. Employees :

• Where the employee receives gratuity, amount not exceeding the commuted value to the extent of 1/3rd of the pension is exempt.
• In other cases : the commuted value of ½ of pension is exempt.