Taxability of Retirement Benefits in India

Retirement benefits are a critical component of financial planning for employees in India. The Income Tax Act, 1961, governs the tax treatment of various retirement benefits provided by employers. This document outlines the tax implications of common retirement benefits, incorporating recent amendments and clarifications.

1. Gratuity

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for services rendered upon retirement, resignation, or superannuation. The eligibility typically requires completion of a minimum service period (usually 5 years, with exceptions).

• Taxability:

  • Gratuity Received During Service: Fully taxable as salary.

  • Gratuity Received at the Time of Retirement/Termination:

    • Government Employees (including employees of Statutory Corporations): Fully Exempt.

    • Employees Covered Under the Gratuity Act, 1972 (Non-Government): The least of the following is exempt:

      • (15/26) * Last Drawn Salary * Completed Years of Service (or part thereof exceeding 6 months).

      • ₹20,00,000 (Rupees Twenty Lakhs).

      • Actual Gratuity Received.

      • For employees of a seasonal establishment: (7/26) * Last Drawn Salary * Completed Years of Service (or part thereof exceeding 6 months).

      • Salary Calculation: Last Drawn Salary for gratuity calculation means last salary drawn, including basic salary, dearness allowance (DA) if it forms part of retirement benefits, and turnover-based commission excluding bonus, commission, HRA, overtime, and any other allowance, benefits or perquisite

    • Employees Not Covered Under the Gratuity Act, 1972 (Non-Government): The least of the following is exempt:

      • (1/2) * Average Salary * Completed Years of Service.

      • ₹20,00,000 (Rupees Twenty Lakhs).

      • Actual Gratuity Received.

      • Average Salary Calculation: Average salary is the average of the salary drawn in the 10 months immediately preceding the month of retirement.

      • Salary Calculation: Salary means Basic Pay + Dearness Allowance (DA, to the extent it forms part of retirement benefits) + turnover-based commission.

2. Pension

Pension is a regular payment made to an employee after retirement or to their family members after the employee's death.

• Types of Pension:

  • (a) Uncommuted Pension: Paid periodically (e.g., monthly)

  • (b) Commuted Pension: A portion of the pension is converted into a lump sum payment.

• Taxability:

  • Uncommuted Pension: Fully taxable as salary. Exception: Disability pension paid to disabled armed forces personnel is exempt.

  • Family Pension: 33.33% of the family pension, subject to a maximum of ₹15,000, is exempt from tax. Exception: Family pension received by the family members of the armed forces is fully exempt.

  • Commuted Pension:

    • Employees of Central/State Government, Local Authorities, and Statutory Corporations: Fully Exempt.

    • Other Employees (with gratuity received): 1/3 of the commuted pension is exempt.

    • Other Employees (without gratuity received): 1/2 of the commuted pension is exempt.

3. Leave Encashment

Leave encashment refers to the payment received by an employee for unutilized accumulated leave, either during employment or upon retirement/termination.

• Taxability:

  • Leave Encashment During Service: Fully taxable as salary.

  • Leave Encashment on Death of the Employee: Fully exempt.

  • Leave Encashment on Retirement/Termination:

    • Government Employees: Fully Exempt.

    • Other Employees (Non-Government): The least of the following is exempt:

      • Amount actually received.

      • Unutilized Earned Leave * Average Monthly Salary.

      • 10 months' Average Salary.

      • ₹25,00,000 (Rupees Twenty-Five Lakhs).

      • While computing unutilized earned leave, earned leave entitlements cannot exceed 30 days for each year of service rendered to the current employer.

      • Average Salary Calculation: Average of the salary of the last 10 months immediately preceding the retirement.

      • Salary Calculation: Salary = Basic Pay + Dearness Allowance (DA, to the extent it forms part of retirement benefits) + turnover-based commission.

4. Voluntary Retirement Scheme (VRS)

VRS offers employees an option to retire early. Compensation received under VRS is taxable but subject to certain exemptions.

• Taxability: Taxable as "Profits in lieu of Salary."

• Exemption (under Section 10(10C)): The lower of the following is exempt:

  • Compensation received.

  • ₹5,00,000 (Rupees Five Lakhs).

  • Conditions for Exemption:

    • Paid by a specified category of employer.

    • Scheme leads to an overall reduction in the employee strength.

    • Employee has completed 10 years of service or is aged 40 years or more. (Not applicable to employees of a Public Sector Company.)

    • Vacancy is not refilled. Retiring employee cannot be employed by the same management.

    • No prior tax exemption claimed for VRS compensation.

    • Compensation does not exceed:

      • 3 months' salary for each completed year of service or

      • Salary for the remaining period of service.

      • Salary for VRS: Basic Salary + Dearness Allowance (if part of retirement benefits) + Commission.

    • Scheme should apply to all employees (excluding directors).

    • Employee does not claim relief under Section 89.

5. Retrenchment Compensation

Compensation received by a workman upon termination of employment as per the Industrial Disputes Act, 1947, or other relevant laws.

• Taxability:

  • Compensation Under a Scheme Approved by the Central Government: Fully Exempt.

  • Compensation on Closure of the Undertaking Due to Losses: The lower of the following is exempt:

    • ₹5,00,000 (Rupees Five Lakhs).

    • Retrenchment compensation actually received.

    • Average Wage * 15/26 * Completed Years of Service (or part thereof exceeding 6 months).

  • Compensation on Closure of the Undertaking for Reasons Beyond Employer's Control: The lower of the following is exempt:

    • ₹5,00,000 (Rupees Five Lakhs).

    • Retrenchment compensation actually received.

    • Average Wage * 3 months.

6. Provident Fund (PF)

A retirement savings scheme where contributions are made by both the employee and employer.

• Types of Provident Funds and Tax Treatment:

  Feature	Recognised Provident Fund (RPF)	Statutory Provident Fund (SPF)	Unrecognised Provident Fund (UPF)
  Employer's Contribution	Exempt up to 12% of salary (Basic + DA). Taxable above 12% or if the aggregate employer contribution to RPF, NPS, and Superannuation Fund exceeds ₹7,50,000.	Not Taxable	Not Taxable
  Employee's Contribution	Eligible for deduction under Section 80C.	Eligible for deduction under Section 80C.	Not eligible for deduction under Section 80C.
  Interest Earned	Exempt. Taxable if the interest exceeds the notified rate or interest related to employee's contribution exceeds ₹5 lakh in case no employer contribution, or, interest related to employee's contribution exceeds ₹2.5 lakh, in case employer has also contributed.	Exempt, however, Taxable if the interest relating to the employee's contribution above Rs. 5 lakh, in case no contribution is made by the employer, or interest relating to the employee's contribution above Rs. 2.5 lakh, in case employer has also contributed to the fund	Not taxable at the time of accrual.
  Withdrawal (After 5 Years)	Exempt.	Exempt.	Taxable: (a) Employer's contribution; (b) Interest on employer's contribution; and (c) Interest on employee's contribution
  Withdrawal (Before 5 Years)	Taxable: (a) Employer's contribution; (b) Interest on employer's contribution; and (c) Interest on employee's contribution	Exempt	Aggregate of the followings shall be taxable: (a) Employer's contribution; (b) Interest on employer's contribution; and (c) Interest on employee's contribution

  • Salary = Basic Pay + Dearness Allowance (if forming part of retirement benefits)

7. National Pension System (NPS)

A retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

• Tax Treatment:

  • Contributions:

    • (a) Employee's Contribution: Deductible under Section 80C up to 10% of salary, plus an additional deduction of ₹50,000 under Section 80CCD(1B).

    • (b) Employer's Contribution: Deductible up to:

      • 14% of salary for Central/State Government employees.

      • 10% of salary for other employees.

    • (c) Self-Employed Individuals: Deductible up to 20% of gross total income, plus an additional deduction of ₹50,000 under Section 80CCD(1B).

  • Accumulation: Yearly returns on the corpus are tax-free.

  • Withdrawal:

    • (a) Partial Withdrawal: Exempt to the extent of 25% of the contributions made by the employee.

    • (b) Final Withdrawal at Retirement/Opting Out: Exempt up to 60% of the total corpus. The remaining 40% is mandatorily used to purchase an annuity, which is taxable as pension.

    • (c) Amount Received by Nominee on Death of Subscriber: Fully exempt.

  • Pension Income (from NPS annuity): Fully taxable.

INCOME TAX DUE DATE CALENDAR MONTH OF MAY 2025

 

DATE	DESCRIPTION
07/05/2025	• Due date for deposit of Tax deducted/collected for the month of April, 2025. However, all sum deducted/collected by an office of the government shall be paid to the credit of the Central Government on the same day where tax is paid without production of a challan. • Uploading of declarations received in Form 27C from the buyer in the month of April, 2025
15/05/2025	• Due date for issue of TDS Certificate for tax deducted under section 194-IA in the month of March, 2025 • Due date for issue of TDS Certificate for tax deducted under section 194M in the month of March, 2025 • Due date for issue of TDS Certificate for tax deducted under section 194S (by specified person) in the month of March, 2025 • Due date for furnishing of Form 24G by an office of the Government where TDS/TCS for the month of April, 2025 has been paid without the production of a challan • Quarterly statement of TCS deposited for the quarter ending March 31, 2025 • Due date for furnishing statement in Form no. 3BB by a stock exchange in respect of transactions in which client codes have been modified after registering in the system for the month of April, 2025 • Due date for furnishing statement by a recognised association in respect of transactions in which client codes been modified after registering in the system for the month of April, 2025 • Due date for issue of TDS Certificate for tax deducted under section 194-IB in the month of March, 2025
30/05/2025	• Due date for furnishing of challan-cum-statement in respect of tax deducted under section 194-IA in the month of April, 2025 • Due date for furnishing of challan-cum-statement in respect of tax deducted under section 194M in the month of April, 2025 • Due date for furnishing of challan-cum-statement in respect of tax deducted under section 194-IB in the month of April, 2025 • Issue of TCS certificates for the 4th Quarter of the Financial Year 2024-25 • Furnishing of statement required under Section 285B for the previous year 2024-25
31/05/2025	• Quarterly statement of TDS deposited for the quarter ending March 31, 2025 • Return of tax deduction from contributions paid by the trustees of an approved superannuation fund • Due date for furnishing of statement of financial transaction (in Form No. 61A) as required to be furnished under sub-section (1) of section 285BA of the Act respect for financial year 2024-25 • Due date for e-filing of annual statement of reportable accounts as required to be furnished under section 285BA(1)(k) (in Form No. 61B) for calendar year 2024 by reporting financial institutions • Application for allotment of PAN in case of non-individual resident person, which enters into a financial transaction of Rs. 2,50,000 or more during FY 2024-25 and hasn't been allotted any PAN • Application for allotment of PAN in case of person being managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer or office bearer of the person referred to in Rule 114(3)(v) or any person competent • Application in Form 9A for exercising the option available under Explanation to section 11(1) to apply income of previous year in the next year or in future (if the assessee is required to submit return of income on or before July 31, 2025) • Statement in Form no. 10 to be furnished to accumulate income for future application under section 10(21) or section 11(1) (if the assessee is required to submit return of income on or before July 31, 2025) • Statement of donation in Form 10BD to be furnished by reporting person under section 80G(5)(iii) or section section 35(1A)(i) in respect of the financial year 2024-25 • Certificate of donation in Form no. 10BE as referred to in section 80G(5)(ix) or section section 35(1A)(ii) to the donor specifying the amount of donation received during the financial year 2024-25. • Furnishing of the certificate from a Chartered Accountant specifying the amount invested in each year by the company or fund making application under section 2(48) for notification of zero-coupon bond

 

 

Startup India: Empowering Entrepreneurs and Shaping the Future of the Nation

1.  Introduction:

• Hook: Start with a compelling statistic or anecdote about the rapid growth of Indian startups. (e.g., "India is now the third-largest startup ecosystem globally...")

• Context: Briefly introduce the significance of startups in India's economic landscape and their impact on innovation and job creation.

• Thesis Statement: Clearly state the blog's purpose: to explore the benefits, financial support, and government initiatives driving the startup boom.

II. The Significance of Indian Startups:

• Economic Contribution:

  • GDP Growth: Explain how startups contribute to the country's overall economic growth.

  • Employment Generation: Highlight the role of startups in creating jobs, particularly for young Indians.

  • Innovation Catalyst: Discuss how startups are disrupting traditional industries and introducing new technologies and business models.

• Focus Areas:

  • mention specific sectors experiencing strong growth (e.g., Fintech, E-commerce, Edtech, Healthcare)

  • Mention the role of the new generation in entrepreneurship.

• Societal Impact:

  • Addressing local challenges and providing solutions.

III. Benefits of Starting a Startup in India:

• Market Opportunities:

  • Vast and growing domestic market.

  • Access to global markets.

  • Discuss the role of digital adoption.

• Talent Pool:

  • Availability of skilled professionals.

  • Growing entrepreneurial mindset.

• Government Support:

  • Incentives and schemes offered.

  • Focus on ease of doing business.

• Access to Resources:

  • Incubation and accelerator programs.

  • Mentorship opportunities.

IV. Financial Support for Startups:

• Venture Capital and Angel Investment:

  • Explain the role of VC funds and angel investors.

  • Highlight funding rounds (Seed, Series A, etc.).

• Government Funding and Grants:

  • Specific schemes like Startup India Seed Fund.

  • Eligibility criteria (briefly).

  • Highlight government programs for specific industries.

• Loans and Credit Facilities:

  • Information about bank loans and other financial instruments.

• Crowdfunding:

  • Mentioning Crowdfunding as an alternative for finance and the rules for it.

V. Government Initiatives to Promote Startups:

• Startup India Initiative:

  • Detailed explanation of the program and its benefits (e.g., tax exemptions, simplified regulations, IPR protection).

• Startup India Seed Fund Scheme:

  • Eligibility criteria and support provided.

• Fund of Funds for Startups (FFS):

  • How it works and its importance.

• Atal Innovation Mission (AIM):

  • Explain its role in promoting innovation across different levels.

• Specific Sector-Focused Initiatives:

  • Mention any government programs specific to sectors (e.g., Fintech Regulatory Sandbox).

VI. Challenges Faced by Startups:

• Funding Challenges:

  • Explain difficulties in getting funding, particularly in early stages.

• Competition:

  • Discuss the rising competition in various sectors.

• Infrastructure and Regulations:

  • Explain challenges with infrastructure and regulations.

• Talent Acquisition:

  • Discussing difficulty finding the right people.

VII. Success Stories & Examples:

• Feature prominent Indian startups that have achieved success in different sectors.

• Share their stories, including their initial challenges and funding journeys.

VIII. The Future of the Indian Startup Ecosystem:

• Growth Potential: Discuss the future prospects of the startup ecosystem, considering factors like digital adoption, government support, and the emergence of new technologies.

• Emerging Trends: Identify emerging trends such as sustainable startups, deep tech startups, or other areas that are gaining traction.

IX. Conclusion:

• Recap: Briefly summarize the key takeaways.

• Call to Action: Encourage readers to learn more, explore startup opportunities, or support Indian startups.

• Concluding Thought: Offer a final, optimistic statement about the future of entrepreneurship in India.