Are retirement benefits like PF and Gratuity taxable? – myITreturn Help Center

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Taxation of Salary, Pension, PF, Gratuity and Retirement Benefits

Employment and retirement receipts may be fully taxable, partly exempt or fully exempt depending on the payment, employer category, service period and tax regime. Each component should be classified separately before filing the ITR.

Salary Income

Salary generally includes basic pay, dearness allowance, bonus, commission, taxable allowances, perquisites, advance salary, arrears, pension and taxable retirement benefits. Salary is taxable on the earlier of due or receipt, subject to specific exemptions.

Deduction	AY 2026-27 treatment
Standard deduction	Up to ₹50,000 under the old regime or ₹75,000 under the default new regime.
Professional tax	Deductible under the old regime when actually paid; generally unavailable under the new regime.
Entertainment allowance	Limited deduction for eligible Government employees under the old regime.

Medical reimbursement update: The former general ₹15,000 medical-reimbursement exemption is obsolete. A fixed medical allowance is generally taxable. Only specific medical facilities, insurance payments or reimbursements satisfying current statutory conditions may be exempt.

Pension and Family Pension

Own uncommuted pension: Taxable as salary; standard deduction applies.
Family pension: Taxable under other sources; deduction is lower of one-third or ₹15,000 under the old regime, and lower of one-third or ₹25,000 under the new regime.
Government commuted pension: Generally, fully exempt.
Other employees: One-third of full commuted value is generally exempt where gratuity is received; one-half where gratuity is not received.

Provident Fund

Employee EPF contribution may qualify under section 80C in the old regime.
Employer contribution above 12% of salary may be taxable.
Aggregate employer contribution to recognised PF, NPS and approved superannuation fund above ₹7.5 lakh is taxable as a perquisite, along with attributable annual accretion.
Interest attributable to employee contribution above ₹2.5 lakh is taxable where the employer contributes; the threshold is ₹5 lakh where there is no employer contribution.
Withdrawal after five years of continuous service is generally exempt; premature withdrawal may be taxable.

PF TDS: A taxable premature withdrawal exceeding ₹50,000 may attract TDS under section 192A. The final taxable amount must still be computed and reported in the ITR.

Gratuity

Recipient	Exemption
Eligible Government employee	Generally fully exempt.
Employee covered by the Payment of Gratuity Act	Least of actual gratuity, ₹20 lakh, or 15/26 × last drawn eligible salary × completed years of service, counting a part exceeding six months.
Other employee	Least of actual gratuity, ₹20 lakh, or half-month average eligible salary × completed years of service.

Gratuity received during service is generally fully taxable. The ₹20 lakh limit is a cumulative statutory ceiling for covered non-government gratuity exemptions.

Leave Encashment and Voluntary Retirement

Leave encashment during service: Generally taxable.
Government employee at retirement: Generally fully exempt.
Other employee at retirement: Exemption is the least of actual receipt, eligible leave balance, ten months’ average salary or ₹25 lakh.
Voluntary retirement compensation: Exemption up to ₹5 lakh may apply once, subject to section 10(10C) conditions. Relief under section 89 cannot be claimed on the same exempt compensation.

ITR Reporting Checklist

Reconcile Form 16, AIS and Form 26AS.
Separate taxable salary, exempt allowances and taxable perquisites.
Classify own pension and family pension correctly.
Report exempt retirement receipts in the exempt-income schedule where required.
Use Form 10E before claiming eligible relief for arrears or specified lump-sum receipts.
Retain gratuity, commutation, leave, PF and retirement calculation statements.

Use component-wise treatment: A retirement settlement may contain salary arrears, leave encashment, gratuity, PF and pension commutation. Do not treat the entire amount as either fully taxable or fully exempt.

Income-tax Act, 2025 Transition

FY 2025-26 and AY 2026-27 remain governed by the Income-tax Act, 1961. Employment and retirement amounts arising in tax year 2026-27 from 1 April 2026 fall under the Income-tax Act, 2025. Broad reliefs continue, but the new section numbers and prescribed forms should be used for the relevant tax year.

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