Taxability of Gratuity and Pension under Income Tax Act Gratuity Taxability – Section 10(10)

Gratuity Taxability – Section 10(10)

Taxability of Gratuity and Pension under Income Tax Act

Gratuity Taxability – Section 10(10)

🔹 For Government Employees:

• Central and State Government employees, employees of local authorities, and employees of defence services are fully exempted from income tax for retirement benefits paid like Gratuity and pension paid (commuted).
• There is no monetary ceiling on the exemption for gratuity or commuted pension received by government employees.

🔹 For Non-Government Employees

Gratuity is partially exempt under Section 10(10)(iii). The exemption is the least of the following:

• ₹20 lakh (maximum lifetime exemption limit)
• Actual gratuity received
• Half month’s average salary × completed years of service

Salary includes basic salary and dearness allowance (if applicable).

If gratuity exceeds the exempt amount, the excess is taxable under the head “Income from Salary.”

Pension Taxability – Section 10(10A) of the Income Tax Act

Pension is a retirement benefit paid periodically or as a lump sum. It is classified as:

🔹 Commuted Pension (Lump Sum)

• Tax Exemption for Non-Government Employees under Section 10(10A)(ii):
  • If gratuity is received: One-third of the commuted pension is exempt.
  • If gratuity is not received: One-half of the commuted pension is exempt.
  • The remaining amount is taxable as salary income.
• Commuted pension to government employee is fully exempt.

🔹 Uncommuted Pension (Monthly) to Government employee or non-government employee:

• Fully taxable under the head “Income from Salary.”
• No exemption under Section 10(10A).

Pension Scenario: Commuted Pension Taxability

• Employee Type: Private sector (non-government)
• Monthly Pension Entitlement: ₹30,000
• Commutation: 40% of pension is commuted
• Commuted Pension Received: ₹7,20,000
• Gratuity Received: ₹5,00,000

Calculation Case 1: Gratuity Received

• Full Commuted Value: ₹30,000 × 12 × 40% = ₹1,44,000
• Exempt Amount: ₹1,44,000 × 1/3 = ₹48,000
• Taxable Amount: ₹7,20,000 − ₹48,000 = ₹6,72,000

Calculation Case 2: Gratuity NOT Received

• Exempt Amount: ₹1,44,000 × 1/2 = ₹72,000
• Taxable Amount: ₹7,20,000 − ₹72,000 = ₹6,48,000

Summary of Taxability for Non-Government Employees:

Summary of Taxability for Government Employees: