Income tax returns 2024: Know the tax tricks for pensions, gratuity and provident fund

Income tax returns 2024: Are you a soon-to-be retiree navigating the complexities of income tax returns in 2024? Filing taxes is a mandatory process for all citizens, and for those entering retirement, understanding the tax implications on pensions, gratuity, and employee provident fund becomes crucial, say experts. The taxability of these benefits hinges on various factors, such as the type of benefit, the received amount, and your individual tax status.

Retirement benefits, encompassing pensions, gratuity, provident fund payments, leave encashment, and Dearness Allowance (DA), fall within the 'Salaries' category and are treated as 'profits in lieu of Salaries' under section 17(3).

Retirement tax snapshot

Government retirees receive full tax exemption on the lump sum pension at retirement, termed pension maturity. Conversely, private sector workers may encounter a different scenario, potentially facing taxation on 50 per cent of the total pension amount (gratuity excluded), while the remaining 50 per cent escapes income tax. Monthly pensions, however, are subject to standard income taxation.

Gratuity, another significant retirement benefit, is fully exempt from taxation for government employees. Non-government employees covered under The Payment of Gratuity Act, 1972, receive exemptions based on the lowest amount amongst the actual gratuity received, 15 days' salary per year worked, or Rs 20 lakh. Those not covered by the Act have exemptions based on the actual gratuity amount, half-month salary per year worked, or Rs 10 lakh.

Employee Provident Fund (EPF) withdrawals post-retirement are exempt from tax, as per the Income-tax (IT) Act. The accumulated balance to the employee’s credit on the date of employment cessation is exempt, provided the employee has rendered continuous service for five years or more, or if the service was terminated due to specific reasons. However, interest accrued post-retirement is taxable.

Leave encashment benefits received at retirement, up to Rs 25 lakh, are tax-free in the hands of the salaried class under the new income tax regime introduced in the Union Budget 2023.

According to experts, for individuals filing Income Tax Returns (ITR) related to retirement benefits, it's crucial to gather pertinent documents, including pension statements and Form 16. Calculating the tax liability on these benefits, considering available deductions and exemptions, is crucial. Section 80C of the Income Tax Act offers deductions of up to Rs 1.5 lakh in the old tax regime.