Income Tax: Liabilities of PF and Gratuity - All you need to know

A retired life of an individual begins with the liquidation of the post-retirement benefits such as gratuity or provident fund. However, there is one aspect that many tend to forget but is very essential is computing the tax liability. Not paying the due tax can lead to several financial and legal complications and this is why it is important to know about the exact tax liability on these benefits. 

Here is everything you need to know about the tax liabilities with respect to PF and Gratuity:-

Tax liability on gratuity

Gratuity is a payment that an employer makes to his employee for the services provided him during his employment tenure. Mostly, gratuity is paid at the time of retirement, but if certain conditions are met, it can be paid earlier too. Any company, which has 10 or more employees on any day in the preceding 12 months is liable to pay gratuity. And if post this, the number of employees reduces, the Gratuity Act will always remain valid.

Tax Expert, Manish Gupta told Zee Business Online, ''According to rules in Payment of Gratuity (Amendment) Act, 2018, the tax-free gratuity has been increased to Rs 20 lakh, while earlier it was Rs 10 lakh only. The new rule has come into force on March 29, 2018.''

According to CA Sandeep Kanoi, for every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned employee. In case of any other employee, gratuity received shall be exempt subject to the following limits:

(a) The exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service

(b) Rs 10 lakhs whichever is less.

Tax Liability on Provident Fund

Both the employee and the employer contribute a part of their salary to the Provident Fund account. While making a contribution, the amount contributed by the employer is tax-free if it is within the specified limit, which is 12%. If the amount contributed by the employer is more than 12%, it would be taxed under the head ‘Income from Salary‘.

The contribution towards PF can be claimed as a deduction under Section 80C. The maximum deduction that is permitted under Section 80C is Rs. 1,50,000. While the interest that is earned from PF at more than 9.5% rate is taxable as ‘Income from Other Sources’.

However, if a taxpayer withdraws amount before 5 years, the taxability of the investment amount and the interest amount varies.