IT Returns: Filing annual income tax returns is mandatory for all Indian citizens, with the deadline for filing returns set on July 31. Upon retirement, employees are required to pay taxes on various benefits such as pension, gratuity, and the Employee Provident Fund (EPF). In India, employers typically offer retirement benefits to their employees, with common options including pension, EPF, and the National Pension System (NPS). These benefits are subject to taxation under the category of 'Salaries' as 'profits in lieu of Salaries' as outlined in section 17(3) of the tax regulations.

Retirement benefits are financial rewards provided to individuals after they have retired from their work and entered into their post-career phase. It is crucial for individuals to have a clear understanding of the tax implications associated with the retirement benefits they receive.

These benefits may encompass various forms such as gratuity, commuted pensions, leave encashments, General Provident Fund (GPF) withdrawals, retirement plans, and social security benefits. While a pension is a fixed retirement fund for an employee paid as a regular income at regular intervals during his post-retirement years.

It is advisable for retirees to assess the taxability of each benefit received in order to effectively plan their finances during retirement.

Taxes on pension

Retired individuals receive pension, which is a vital retirement benefit in India, especially for those who were employed in the government sector. Pension is disbursed either as a lump sum payment, a monthly allowance, or a blend of both options.

There are two primary types of pension:

(a) Commuted Pension: Commutation of pension involves the immediate payout of a lump sum amount to an employee in exchange for forgoing a portion of the regular monthly pension.

(b) Uncommuted Pension: When the pension is received in periodic installments, it is termed as uncommuted pension.

Tax on lumpsum pension vs monthly pension

It is essential to understand that the taxation process varies for government and non-government employees concerning retirement benefits. Government employees are entitled to receive a lump sum amount known as pension maturity at the time of retirement, which is entirely exempted from taxes. Conversely, non-government employees, who receive a pension amount equal to 100 percent minus the gratuity, are required to pay taxes on 50 percent of the total amount, while the remaining 50 percent is exempted from income tax.

In the case of private sector employees receiving a pension comprising 100 percent including gratuity, a different tax treatment applies. One-third of the amount is exempted from tax, and the remaining two-thirds is subject to taxation.

On the other hand, the pension received as monthly income is taxed as usual salary as it is tagged as income.

Taxes on gratuity

Government employees are eligible for total exemption from tax on the gratuity amount received upon retirement. For non-government employees covered under The Payment of Gratuity Act, 1972, the exemption is based on the lowest amount among the following: the actual gratuity received, 15 days' salary multiplied by the number of years worked, or Rs 20 lakh. The calculation for salary in this scenario is the last drawn salary of the employee multiplied by the number of years employed, then multiplied by 15/26.

Non-government employees not covered under The Payment of Gratuity Act, 1972, are entitled to exemption on the lowest amount calculated as the actual gratuity received, half month's salary for each year worked, or Rs 10 lakh. The salary considered here is the average of the last 10 months' salary and includes basic salary, dearness allowances, and performance-related incentives.

Taxes on Employee Provident Fund

Employee Provident Fund (EPF) amount is exempted from tax upon withdrawal after retirement according to the provisions of the Income-tax (IT) Act. The accumulated balance in the employee’s EPF account at the time of the cessation of employment is not subject to tax.

Under the IT Act, if an employee has served continuously with their employer (including past employers if the PF has been transferred) for a period of five years or more, or if the employment was terminated due to reasons like ill health, contraction, discontinuance of employer's business, or any other circumstances beyond the control of the employee, the EPF amount is exempt from tax.

Nevertheless, any interest earned on the accumulated balance post-retirement (during the period of non-contribution to the EPF) is taxable, regardless of the total contribution period to the EPF.

Taxes on leaves

In the Union Budget 2023, it was announced that the leave encashment benefits received by the salaried class at retirement will be tax-free in their hands under the new income tax regime. The limit for these benefits has been increased from Rs 3 lakh to Rs 25 lakh. Additionally, individuals are allowed to switch to the new regime even in the year of their retirement, providing them with more flexibility in managing their finances.

How to report pension income while filing ITR

When reporting pension income and employer details in the income tax return, it's important to consider the specific type of pension received and the details of one's employment history. The reporting requirements can differ depending on the nature of the pension and the specific characteristics of the employment in question. It's advisable to review the applicable guidelines and regulations to ensure accurate and compliant reporting of this information.

Steps to file ITR:

> Obtain Form 16 or Pension Statement
> Understand your pension type
> Report Pension Income in the Appropriate Section
When filling out your income tax return, remember to disclose your pension income in the correct section based on its source. Typically, government pensions are categorized under "Income from Salaries," while other pensions should be reported under "Income from Other Sources."
> Enter Employer Details
On the income tax return form, you are required to provide information about your employer or pension provider. This includes their name, address, and tax identification number (TAN).
> Declare Commuted Pension Details (if applicable)
If you have received a commuted pension, there might be a separate section in the income tax return form where you need to declare the commuted amount and other relevant details.
> Claim Deductions (if applicable)
Depending on the type of pension you have and the tax laws in your country, you might qualify for deductions on your pension income. These deductions could include the standard deduction or allowances under Section 80TTB for senior citizens. It is important to review the available deduction options that apply to your situation.
> Validate and File
Once you have accurately entered all the necessary details, validate the information and file your income tax return.