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Business News/ Money / Personal Finance/  Are retirement benefits taxable? How retired employees can file ITR in FY24?
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Are retirement benefits taxable? How retired employees can file ITR in FY24?

Retirement benefits are cash advantages received by retired people in their golden years.

Individuals should be aware of the taxability of any retirement benefits they receive, including gratuity, commuted pensions, leave encashments, GPF, retirement plans, social security benefits, etc.Premium
Individuals should be aware of the taxability of any retirement benefits they receive, including gratuity, commuted pensions, leave encashments, GPF, retirement plans, social security benefits, etc.

Retirement benefits are cash advantages received by retired people in their golden years. Individuals should be aware of the taxability of any retirement benefits they receive, including gratuity, commuted pensions, leave encashments, GPF, retirement plans, social security benefits, etc. These benefits are taxed under ‘Salaries’ as ‘profits in lieu of Salaries’ as specified in section 17. (3). Retired individuals need to be aware of how retirement benefits are taxed during FY24, and they may learn this from various industry experts here.

S. Ravi, Former Chairman of BSE (Bombay Stock Exchange)

Retirement benefits are an important consideration for those who have worked hard throughout their careers and are looking forward to their retirement years. However, many people may not be aware that these benefits are subject to taxation. In India, retirement benefits such as pensions, gratuities, and other forms of superannuation are taxable under certain conditions.

The taxability of retirement benefits depends on a number of factors, including the type of benefit, the amount received, and the individual's tax status. For example, if an individual receives a pension from a former employer, that pension is taxable as income in the year it is received. Similarly, if an individual receives a gratuity payment upon retirement, that payment may also be subject to taxation.

To file income tax returns (ITR) for retirement benefits, individuals should gather all relevant documentation, such as pension statements and Form 16. They should then determine the amount of tax owed on their retirement benefits and file their ITR accordingly.

It is important to note that while retirement benefits may be subject to taxation, there are also several deductions and exemptions available to retirees that can help to reduce their tax burden. For example, under Section 80C of the Income Tax Act, individuals can claim a deduction of up to Rs. 1.5 lakh on their taxable income.

In conclusion, retirement benefits are indeed taxable in India, and individuals should be aware of the tax implications when planning for their retirement. However, with careful planning and the help of a qualified tax professional, retirees can navigate the tax system and make the most of their retirement savings.

Sujit Bangar, Founder, Taxbuddy.com

Retirement benefits are a crucial source of income for retirees, but the taxability of these benefits varies based on the type received. Uncommuted pension, which is paid in installments, is fully taxable as "Income from Salary" for both government and non-government employees.

Commuted pension, which is a lump sum payment at retirement, is fully exempt for government employees but may be partially exempt for non-government employees, depending on their retirement plan and the amount of gratuity received. Individuals must report their retirement benefits as part of their total income when filing their Income Tax Return (ITR) and pay tax accordingly.

For example, Under the Payment of Gratuity Act, gratuity is exempt from tax up to a limit of Rs. 20 lakhs, while for those not covered by the act, the tax exemption limit is Rs. 10 lakhs. If the gratuity amount surpasses these specified limits, tax will be levied only on the excess amount.

Abhishek Soni, Co-founder & CEO of Tax2win

Retirement benefits are a great way to secure one's financial future, but it is important to remember that they are subject to taxation, either fully or partially. Most of the retirement benefits are tax-free for government employees. Common retirement benefits such as a pension, gratuity, Voluntary Retirement Schemes (VRS), leave encashment, and National Pension Scheme (NPS) are taxed based on income tax slab rates and other applicable provisions of the law. You can file the income tax return through the government e-filing portal or online tax filing portals where you need to disclose these benefits in your total income. Even if your income is tax-free, it is suggested to disclose the same in the ITR.

Dr. Suresh Surana, Founder, RSM India

Yes, retirement benefits are taxable in most of the cases. Some of the common retirement benefits include gratuity, pension and provident fund, the tax implications for which are discussed as below:

Tax Implications of Gratuity

Gratuity is a monetary benefit received by an employee either at the time of retirement, on death, on resignation or during the course of employment. Any gratuity received by an employee during the course of his/her employment shall be fully taxable under the provisions of IT Act.

Further, any death cum retirement gratuity received by government employees shall be fully exempt from tax u/s 10(10)(i) of IT Act whereas other than government employees may claim exemption upto certain amount as follows:

For employees covered by The Payment of Gratuity Act, 1972

In accordance with Section 10(10)(ii) of IT Act, the exemption amount would be least of the following:

a. Actual amount of Gratuity received

b.15 days salary for each completed year of service or part of the year in excess of 6 months (i.e. 15/26 * Last drawn salary * completed years of service)

c.Rs. 20,00,000

For employees not covered by The Payment of Gratuity Act, 1972

In accordance with Section 10(10)(iii) of IT Act, the exemption amount would be least of the following:

a.Actual amount of Gratuity received

b.½ month’s salary for each year of completed service, calculated on the basis of the average salary for the last 10 months (i.e. 15/30 *Average salary of 10 months* completed years of service)

c.Rs. 20,00,000

For the purpose of aforementioned computation, salary for the purpose of this clause includes Basic Salary, Dearness Allowance (if provided in the terms of employment) and commission as a percentage of turnover achieved by the employee.

Tax Implications of Pension u/s 10(10A) of IT Act

Pension is paid out by the employers to retired individuals, periodically, generally monthly. However, an individual may choose to receive pension lump sum instead of periodical payment. Thus, pensions can be received in two ways, first is on a monthly basis (uncommuted pension) and second is by way of a lump-sum (commuted pension). Uncommuted pension is always taxable as salary in the hands of both government as well as non-government employees.

The taxability of commuted pension is as follows:

· Any commuted pension received by any government employee is wholly exempt from tax.

·In case of other than government employees,

· One third of the amount of commuted pension which the employee would have received had he commuted the whole of pension shall be eligible for exemption provided such employee is also in receipt of gratuity.

· One half of the amount of commuted pension which the employee would have received had he commuted the whole of pension shall be eligible for exemption in case where such employee has not received any income in the nature of gratuity.

Tax Implications of Provident Fund

The tax implication of the amount of provident fund received at the time of retirement would depend upon the type of the provident fund i.e. recognized or unrecognised provident fund, statutory provident fund, etc. For instance, in case of Recognised, Statutory Provident Fund, etc., the amount withdrawn at the time of retirement/ termination would be exempt u/s 10(11) and 10(12) of the IT Act. Such exemption would be withdrawn in case of interest income earned on Provident Fund (Recognised and Statutory) on annual contribution in excess of Rs. 2,50,000 and any interest earned on PF Contribution on such excess contribution would be taxable under the head ‘Income from Other Sources’.

How to report the retirement benefits in the ITR

· Every taxpayer receiving the retirement benefits should include the monetary quantum of such benefits in the Gross Salary under Schedule S ‘Details of Income from Salary’.

· Further, the taxpayer if claiming any exemption under section 10 of the IT Act with respect to such retirement benefits received should disclose the same under Point 3 of Schedule S which provides for “Allowances to the extent exempt u/s 10". The details of such exemption would be provided by selecting the drop down options as provided in e-filing utility.

Suman Bannerjee, CIO, Hedonova

Yes they are taxable. The Indian Income Tax Act, 1961 makes it mandatory for income earned from employment, whether salary or otherwise, to be taxed. If you’re on the verge of retirement, you need to consider how to manage your retirement benefits. Consulting an investment advisor is certainly a good bet. However, it also helps to do your own homework to avoid being clubbed in the high tax bracket as you near retirement.

Pensions, gratuity, provident fund payments, Voluntary Retirement Scheme (VRS), leave encashment and Dearness Allowance (DA) comprise the retirement benefits under Indian labour laws. Depending on the tax slab you fall under, you may have to be anywhere between 5% and 30% tax on lump sum payouts after retirement.

Here are the steps you need to follow to report pension in ITR-

In the ITR, choose the ‘Pensioners’ option under the ‘Nature of Employment’ field.

Pension taxable as ‘salary’ needs to be mentioned. The taxpayer needs to mention the name, tax collection account number (TAN) of the employer, etc.

Any amount that is excess needs to be reported under ‘Salary under Section 17(1)’ as ‘Annuity Pension’.

The commuted pension that is exempted from tax must be entered under the ‘Nature of Exempt Income’ in the field ‘Any Other’. Mention the amount of commuted pension and details in ‘Description’.

Akhil Chandna, Partner, Tax, Grant Thornton Bharat

Retirement benefits includes various options such as pension, withdrawal of provident fund accumulation, gratuity, leave encashment, pensions, etc. Taxability under various retirement benefits is broadly summarised in table below:

Employee Provident FundWithdrawal of accumulated balance in EPF is taxable if the period of continuous service is less than 5 years.
Public Provident FundMaturity amount withdrawn is exempt from tax
GratuityGratuity received above INR 20 Lakhs is taxable
Leave encashmentsTaxable above INR 3 Lakhs
Uncommuted pensionFully Taxable
Commuted PensionThe commuted value of 1/3 of the pension is exempt (only for non-government employees who receive gratuity as well)
Family PensionFully taxable after allowing a deduction of 33.33% or Rs. 15,000 whichever is less.

The taxable portion of various retirement benefits are required to be disclosed in the relevant head of income in the various schedules forming part of the Income tax return (ITR). For example, income from pension, or the taxable portion of gratuity, leave encashment, etc is required to shown under income under the head ‘salaries’. Important to note that exempt income is also required to be disclosed in the ITR in schedule EI.

In case of senior citizens of the age of 75 years or above having only pension income and interest income only from the account(s) maintained with a bank in which they receive such pension, they shall not be required to file their ITRs.

For other individual taxpayers, if the retirement income is exceeding the basic exemption limit, ITR-1 to ITR-4 as applicable is required to be filed online.

C.A. Ms. Ashwini Khade- Principle Consultant - Catalyst Trusteeship Ltd

Yes, it is taxable but it completely depends upon the nature of the benefit & the criteria upon which it falls. There are various clauses amended by the law for the taxation of retirement benefits which are as follows:

1. Provident Fund (PF) contribution along with interest thereon up to the date of retirement is exempt, if service at the time of retirement is more than 5 years.

2. Gratuity - Exempt up to Rs. 20 lakhs or gratuity calculated as per payment of gratuity act,1961 whichever is lower.

3. Superannuation fund- If the corpus of superannuation is commuted, then the amount up to 1/3rd of the corpus is exempt, if more amount is commuted over and above this, it will be taxable.

4. Pension received on monthly basis will be taxable.

For filing the ITR, any taxable amount as per the clauses mentioned above should be added to the salary while filing the same.

Karma Global

Pension is taxable under the head salaries in your income tax return. Pensions are paid out periodically, generally every month. However, you may also choose to receive your pension as a lump sum (also called commuted pension) instead of a periodical payment.

As per Budget 2023: Standard Deduction on family pension under the new tax regime: 15,000 or 1/3rd of the pension amount, whichever is lower.

All individuals who have an annual income over 2,50,000 are liable to pay income tax. However, the case is different for pensioners; they enjoy a certain exemption. They are required to file ITR-1 (Sahaj) online after calculating the exemption.

Somya Srivastava, Founder of Prayatna Microfinance.

Retirement benefits are an integral part of post-retirement financial planning, and it's crucial to be aware of their tax implications. While some retirement benefits are tax-free, others can be taxable. It's important to understand the rules and regulations governing their taxation to avoid any unpleasant surprises come tax season,"says Somya Srivastava, Founder of Prayatna Microfinance.

Retirement benefits, such as pension, gratuity, and provident fund, can be taxable based on various factors such as the amount received, service tenure, and the applicable tax laws during retirement. For instance, gratuity exceeding Rs. 20 lakhs becomes taxable as per the Income Tax Act, 1961. Similarly, the amount received from a provident fund before completing five years of continuous service is taxable in the year of withdrawal.

If you've received taxable retirement benefits, ensure to include them while filing your income tax return (ITR). You can add the taxable amount to your total income for the year and calculate the tax liability based on the applicable tax slab rate. Additionally, you can claim deductions on eligible expenses to reduce your taxable income.

When filing your ITR, ensure to have all the necessary documents, such as Form 16, Form 16A, and Form 26AS, related to your retirement benefits. These documents help you accurately calculate the taxable amount and file your ITR correctly.

In summary, being aware of the tax implications of retirement benefits and filing your ITR correctly can help you stay compliant with your tax obligations and plan your finances effectively for your retirement years.

Satyen Kothari, the founder and CEO of Cube Wealth

Retirement benefits may be taxable based on the type of benefit received. If an individual receives a lump sum payout from their pension fund or gratuity, it is taxable based on their income tax slab. However, if the individual receives a regular pension amount, it is taxable based on their income tax slab after allowing for the standard deduction of Rs. 50,000. Additionally, there are some insurance plans that provide tax-free monthly income for a specific period. To file the income tax return (ITR) for taxable retirement benefits, individuals need to include the income from such benefits under the head "Income from Salary" in their ITR form.

 

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ABOUT THE AUTHOR
Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Published: 08 Apr 2023, 09:56 PM IST
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