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How Are Retirement Benefits Taxed?

After retirement, you may stop working while your tax obligation may continue to exist. You can save taxes on retirement benefits, but it requires proper planning.

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Amit Sethi
December 23, 2023
Retirement Benefits Taxed

Retirement Benefits Taxed

After spending their entire life towards work and profession, people expect to live life comfortably in the post-retirement age. This is where the importance of retirement benefits comes into the picture. Retirement benefits are an important consideration for people who depend on them for the rest of their retirement lives. However, these benefits can be taxable and subject to some conditions. A lot of time people get questions on is Retirement Benefit Taxed. Let us discuss some of the popular retirement benefits and how they are taxed in India.

Taxation on Pension 

Pension is the most important retirement benefit available to employees. Pension is usually received in a lump sum, monthly, or a combination of both. The taxation policy differentiates between government and non-government employees. The lump sum amount received as pension maturity is fully exempt from taxes for government employees. For non-government employees who receive a 100 percent pension without any gratuity, only 50 percent of the lump sum pension is exempt from tax and the rest amount is taxable. However, if the 100 percent pension is received by the non-government employee and it also includes gratuity, one-third of the pension is exempt from the tax while the remaining is taxable.

The money that retirees receive as monthly income is taxable under the usual tax regime because this is considered an income and is also known as an uncommuted pension.

Also Read: How Can Senior Citizens Avoid Capital Gains Tax?

Taxation on Gratuity

The gratuity in the hands of Government employees is fully exempt from taxation.

For non-government employees, there are two sets of retirees. The first are those covered by The Payment of Gratuity Act, of 1972. For these employees, the exemption is given on the lowest amount of the following: Actual amount received as gratuity, 15 days salary* for each year working for the firm, or Rs 20 lakh. *(The salary in this case is the last drawn salary x No of employment years x 15/26).

The second set of retirees are those not covered by the Payment of Gratuity Act, of 1972. In this case, the exemption applies to the lowest amount of the following: Actual amount received as gratuity, half month salary* for each year working for the firm, or Rs 10 lakh. *(The salary, in this case, is the average of last 10 months salary)

The salary here includes basic salary, dearness allowances, and any incentive for performance or business growth.

Taxation on Provident Fund

Employee provident fund (EPF) is a major part of retirement benefits. The amount is tax-exempt if it is withdrawn after retirement. Usually, the amount is tax-exempt if you withdraw it after 5 years of continuous service subject to meeting other applicable conditions. Interest earned on EPF corpus after retirement is taxed at the applicable slab rate.

 Before retiring, you may plan various options to lower the taxes if any applicable to the retirement benefits. Saving taxes on retirement benefits can help you with more money in hand that you can use to plan a better retirement life.

 The author is an independent financial journalist.

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