60% of sum obtained from NPS is tax-free

I’m going to retire from a personal agency quickly. What are the tax exemptions out there for a retiree with respect to gratuity, go away encashment payout, provident fund with the EPFO, superannuation with LIC and NPS contributions?

—Name withheld on request

Gratuity: We have assumed that you simply shall render steady service for not lower than 5 years along with your employer and the gratuity payout shall be made beneath the Payment of Gratuity Act, 1972. When an worker receives gratuity, he shall be eligible for an exemption of an quantity equal to decrease of (i) precise gratuity payout or (ii) 15 days’ wages based mostly on final drawn wage for every accomplished yr of service (any interval greater than six months to be thought-about as a full yr) or (iii) ₹20 lakh. However, if an exemption has been claimed for any of the previous tax years, the general exemption (claimed previously and computed above) shall not exceed ₹20 lakh.

Leave encashment payout: When an worker receives go away encashment upon retirement, he shall be eligible for an exemption of an quantity equal to decrease of (i) precise go away encashment payout or (ii) money equal of the go away (on the premise of common of final 10 months’ wage) on the time of retirement calculated at 30 days’ credit score for every accomplished yr of service or (iii) an quantity notified by the federal government ( ₹3 lakh) or (iv) 10 months’ wage (on the premise of common of final 10 months’ wage). However, it could be famous that if an exemption has been claimed for any previous tax years, the general exemption (claimed previously and computed above) shall not exceed the quantity notified by the federal government.

Provident fund: From a tax perspective, the accrued PF stability due and payable to the worker, i.e., stability to his credit score on the date of cessation of his employment, is exempt from tax if he has rendered steady service for a interval of 5 years or extra. In that case, the quantity obtained by you upon withdrawal shall be exempt from tax. However, any accretions to the stability thereafter (i.e., after the final day of working with the present employer until date of withdrawal) can be taxable in your palms.

Superannuation: In case cost is made to an worker from an permitted superannuation fund in lieu of or in commutation of an annuity on his retirement, the whole quantity obtained shall be exempt from earnings tax. However, any annuity obtained thereafter shall be taxable in your palms.

NPS contribution: We have assumed that you’ve got attained 60 years of age and maintain a tier-1 account. As per I-T legal guidelines, any cost 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 doesn’t exceed 60% of the overall quantity payable is tax-free. Accordingly, out of the overall quantity payable to you, 60% of the quantity obtained shall be exempt from tax. Further, in case you select to speculate the stability 40% of the accrued stability to buy a life annuity from any life insurance coverage firm registered with the PFRDA, the whole residual lump sum quantity obtained by you shall be thought-about exempt. However, any annuity obtained thereafter shall be taxable in your palms.

Parizad Sirwalla is associate and head, international mobility companies, tax, KPMG in India.

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