# Tax on Retirement Benefits

> Private-sector employees can receive gratuity tax-free up to ₹20 lakh and leave encashment on retirement up to ₹25 lakh (lifetime limits). Commuted pension is fully exempt for government employees; for others, one-third is exempt if gratuity is also received, or half if not. VRS compensation is exempt up to ₹5 lakh, and PF is tax-free after five years of continuous service. Monthly pension is taxed as salary.

Practice: Salary, RSU & ESOP Tax — https://www.industax.com/services/employee-tax/

Retirement often brings the year's largest income, so timing matters: arrears, leave encashment and gratuity may be spread or relieved under Section 89, and pension income can benefit from the standard deduction.

We compute exemptions, check employer TDS, and plan the deployment of the corpus — SCSS, annuities, debt funds — with their tax treatment.

## Key facts

| Item | Detail |
| --- | --- |
| Gratuity (private) | Exempt up to ₹20 lakh |
| Leave encashment (non-govt) | Exempt up to ₹25 lakh |
| Commuted pension (non-govt) | 1/3 exempt with gratuity, 1/2 without |
| VRS | Exempt up to ₹5 lakh |
| EPF | Tax-free after 5 years' service |

## Who needs this

- Employees retiring or taking VRS
- Retirees with pension income
- Families planning retirement corpus

## What's included

- Exemption computation
- Section 89 relief
- Corpus tax planning
- ITR filing

## Documents

- Settlement statement
- Form 16
- Pension and PF statements

## Process

1. **Compute** — Exemptions on each benefit.
2. **Relieve** — Section 89 where it helps.
3. **Plan** — Corpus deployed tax-efficiently.

## FAQs

### Is leave encashment during service taxable?

Yes. Leave encashed while in service is fully taxable as salary. The ₹25 lakh exemption applies only on retirement or leaving the job.

### Do pensioners get the standard deduction?

Yes. Pension from a former employer is salary, so the standard deduction applies — ₹75,000 in the new regime and ₹50,000 in the old.

### Is family pension taxable?

Yes, under 'Income from other sources', with a deduction of one-third or ₹25,000 (new regime) / ₹15,000 (old regime), whichever is lower.

## Official sources

- incometaxindia.gov.in: https://www.incometaxindia.gov.in/

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Publisher: Indus Tax — CA-led tax and compliance firm (https://www.industax.com). Contact: info@industax.com, 9059139258.
This is general information, not advice for your specific facts.