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60% of sum received from NPS is tax-free

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I’m going to retire from a private firm soon. What are the tax exemptions available for a retiree with respect to gratuity, leave encashment payout, provident fund with the EPFO, superannuation with LIC and NPS contributions?

—Name withheld on request

Gratuity: We have assumed that you shall render continuous service for not less than five years with your employer and the gratuity payout shall be made under the Payment of Gratuity Act, 1972. When an employee receives gratuity, he shall be eligible for an exemption of an amount equivalent to lower of (i) actual gratuity payout or (ii) 15 days’ wages based on last drawn salary for each completed year of service (any period more than six months to be considered as a full year) or (iii) 20 lakh. However, if an exemption has been claimed for any of the preceding tax years, the overall exemption (claimed in the past and computed above) shall not exceed 20 lakh.

Leave encashment payout: When an employee receives leave encashment upon retirement, he shall be eligible for an exemption of an amount equivalent to lower of (i) actual leave encashment payout or (ii) cash equivalent of the leave (on the basis of average of last 10 months’ salary) at the time of retirement calculated at 30 days’ credit for each completed year of service or (iii) an amount notified by the government ( 3 lakh) or (iv) 10 months’ salary (on the basis of average of last 10 months’ salary). However, it may be noted that if an exemption has been claimed for any preceding tax years, the overall exemption (claimed in the past and computed above) shall not exceed the amount notified by the government.

Provident fund: From a tax perspective, the accumulated PF balance due and payable to the employee, i.e., balance to his credit on the date of cessation of his employment, is exempt from tax if he has rendered continuous service for a period of five years or more. In that case, the amount received by you upon withdrawal shall be exempt from tax. However, any accretions to the balance thereafter (i.e., after the last day of working with the current employer till date of withdrawal) would be taxable in your hands.

Superannuation: In case payment is made to an employee from an approved superannuation fund in lieu of or in commutation of an annuity on his retirement, the entire amount received shall be exempt from income tax. However, any annuity received thereafter shall be taxable in your hands.

NPS contribution: We have assumed that you have attained 60 years of age and hold a tier-1 account. As per I-T laws, any payment from the NPS Trust to an assessee on closure of his account or on his opting out of the pension scheme to the extent it does not exceed 60% of the total amount payable is tax-free. Accordingly, out of the total amount payable to you, 60% of the amount received shall be exempt from tax. Further, in case you choose to invest the balance 40% of the accumulated balance to purchase a life annuity from any life insurance company registered with the PFRDA, the entire residual lump sum amount received by you shall be considered exempt. However, any annuity received thereafter shall be taxable in your hands.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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