Who can benefit?
This brochure is designed for individuals who are 60 years or older and have retired from service. It includes benefits available to both government and private sector retirees who receive lump sum payments like gratuity, leave encashment, commuted pension, and withdrawals from retirement savings like the General Provident Fund (GPF) or Recognised Provident Fund (RPF).
Gratuity
Gratuity received by retired employees is tax-free up to ₹20 lakh under Section 10(10) of the Income Tax Act. This exemption applies in full to government employees.
For non-government employees, the exemption is available based on a specific formula and subject to the ₹20 lakh limit.
Commuted pension
Government employees get full exemption on commuted pension. For non-government employees, the exemption depends on whether gratuity has also been received. If gratuity is received, one-third of the commuted pension is exempt from tax. If not, then half of the amount is exempt.
Leave encashment
Leave encashment received at the time of retirement is fully exempt from tax for government employees. Non-government employees can claim exemption up to ₹3 lakh under Section 10(10AA).
The exact amount of exemption depends on several factors including average salary and length of service.
Provident fund
Withdrawals from Statutory Provident Fund and Public Provident Fund are completely tax-exempt. In the case of the Recognised Provident Fund, the maturity amount is exempt from tax provided the employee has completed five years of continuous service.
National Pension System (NPS)
At the time of retirement, up to 60% of the corpus withdrawn from the NPS is tax-free under Section 10(12A). The remaining 40%, which is mandatorily used to buy an annuity, is taxable in the hands of the retiree as per their income tax slab.
Pension and standard deduction
Pension received by a retiree is taxed as “income from salary.” However, a standard deduction of ₹50,000 is available under Section 16(ia), just like for salaried individuals. If the pension is received in arrears, relief under Section 89 can be claimed to reduce the tax burden.
Interest income
Senior citizens are entitled to a higher exemption on interest income. Interest earned up to ₹50,000 from savings accounts and fixed deposits with banks and post offices is exempt under Section 80TTB. This benefit is exclusive to individuals aged 60 years and above.
Health insurance premiums
A deduction of up to ₹50,000 is available under Section 80D on health insurance premiums paid for self or spouse. This includes any premium paid for preventive health check-ups within the overall limit.
Medical treatment for specified diseases
Retired individuals can claim a deduction of up to ₹1 lakh under Section 80DDB for medical expenses incurred for the treatment of specified diseases. These include serious ailments such as cancer, kidney failure, and certain neurological disorders.
No TDS on interest income
Senior citizens whose total income is below the taxable limit can submit Form 15H to their bank or post office. This prevents tax deduction at source (TDS) on interest income and avoids the need for claiming a refund later.
