Video about tax treatment of gratuity and pension as per Finance Act, 2020. useful to all students of CA, CMA, CS and B.Com. (AY 2021-22).
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Retirement is a crucial stage in every individual’s life, and it often comes with many decisions that need to be made, including how retirement benefits such as gratuity and pension will be treated for tax purposes. To help navigate this process, it is essential to understand the tax treatment of gratuity and pension.

Gratuity refers to a one-time payment made by an employer to an employee in recognition of their service. The amount is generally calculated based on the employee’s last drawn salary and the number of years of service. Gratuity is considered a part of your salary income, and as such, it is taxable under the Income Tax Act.

The tax treatment of gratuity varies depending on who the recipient is. If the employee is covered under the Payment of Gratuity Act, 1972, then the maximum gratuity amount that is exempt from tax is Rs. 20 lakhs. Any amount over this limit will be taxable. On the other hand, if the employee is not covered under the Payment of Gratuity Act, 1972, then the gratuity amount that is exempt from tax is limited to a maximum of Rs. 10 lakhs.

Pension refers to the regular payment made to a retired employee as a form of retirement benefit. The pension amount is determined based on various factors such as the employee’s last drawn salary and the number of years of service. In terms of tax treatment, pension income is taxable under the Income Tax Act.

The tax treatment of pension income is different based on the type of pension. In the case of a government pension, the entire amount is taxable as salary income. However, in the case of a non-government pension, a portion of the pension amount is exempt from tax. The portion that is exempt will depend on the number of years of service, the age of the employee, and the amount of pension received.

In conclusion, understanding the tax treatment of gratuity and pension is crucial for individuals who are planning for their retirement. It is vital to plan for the tax implications of these benefits to avoid any unwanted surprises during retirement. It is recommended to consult with a tax professional to ensure that your retirement planning is as effective as possible.