Section 10(13)- Tax Exemptions on payments received from an Approved Superannuation Fund

Section 10(13) of the Income Tax Act, 1961 provides tax exemptions on payments received from an approved superannuation fund under specific conditions. A superannuation fund is a retirement benefit scheme, typically set up by an employer, to provide pension or lump-sum payments to employees upon retirement, death, or certain other events. The exemption under this section applies to amounts received as annuities, commuted pensions, or lump-sum payments, subject to rules laid down by the Income Tax Act and the approval of the fund by the Commissioner of Income Tax.

Key Features of Section 10(13):

1. Eligible Payments:
   • Commuted Pension: A lump-sum payment received in lieu of a periodic pension, either fully or partially.
   • Annuity or Pension: Periodic payments received from the superannuation fund.
   • Lump-Sum Payment: Amounts received on retirement, death, or other specified events.
2. Conditions for Exemption:
   • The superannuation fund must be approved by the Commissioner of Income Tax.
   • The payment must be made under specific circumstances, such as:
     • Retirement at or after the specified age (as per the fund’s rules, typically 60).
     • Death of the employee, where the payment is made to the legal heirs or nominees.
     • Incapacity of the employee, rendering them unable to continue service.
   • For commuted pensions, the exemption depends on whether the employee receives a gratuity:
     • If gratuity is received: Up to one-third of the commuted value of the pension is exempt.
     • If gratuity is not received: Up to one-half of the commuted value of the pension is exempt.
3. Taxability:
   • Exempt portions are not taxable.
   • Non-exempt portions (e.g., uncommuted pension or excess commuted amounts) are taxed as salary under the head “Income from Salaries.”
   • Annuity payments received periodically are generally taxable as salary, unless specifically exempt.

Example of Section 10(13) Exemption:

Let’s consider an employee, Mrs. Sunita, who retires from her job and receives payments from an approved superannuation fund. Below is a detailed example to illustrate how the tax exemption under Section 10(13) works:

Scenario:

• Employee Details: Mrs. Sunita, aged 60, retires in June 2025 after 30 years of service.
• Superannuation Fund: The fund is approved by the Commissioner of Income Tax.
• Total Pension Entitlement: ₹30,00,000 (full value of the pension if taken as an annuity).
• Commutation Option: Mrs. Sunita opts to commute (take as a lump sum) 50% of her pension.
• Gratuity Status: Mrs. Sunita also receives a gratuity of ₹20,00,000 (exempt under Section 10(10)).
• Commuted Amount: 50% of ₹30,00,000 = ₹15,00,000 (lump-sum payment).
• Uncommuted Pension: The remaining 50% will be paid as a monthly pension (taxable as salary).

Calculation:

• Exemption for Commuted Pension:
  • Since Mrs. Sunita receives a gratuity, the exemption is limited to one-third of the commuted value of the pension.
  • Commuted pension received: ₹15,00,000.
  • Full pension value: ₹30,00,000.
  • Proportion commuted: 50% (₹15,00,000 / ₹30,00,000).
  • Exempt portion = One-third of the commuted value of the full pension:
    • One-third of ₹30,00,000 = ₹10,00,000.
    • Since only 50% is commuted, the exempt amount is proportional:
      • Exempt amount = ₹10,00,000 × 50% = ₹5,00,000.
• Taxable Portion of Commuted Pension:
  • Commuted amount received: ₹15,00,000.
  • Exempt amount: ₹5,00,000.
  • Taxable amount = ₹15,00,000 – ₹5,00,000 = ₹10,00,000.
• Tax Implications:
  • The exempt portion (₹5,00,000) is not taxable.
  • The taxable portion (₹10,00,000) is taxed as salary under Mrs. Sunita’s applicable income tax slab rate.
  • Assuming Mrs. Sunita falls in the 30% tax slab (under the new tax regime for FY 2025-26):
    • Tax on ₹10,00,000 = ₹10,00,000 × 30% = ₹3,00,000 (plus applicable cess, e.g., 4% cess = ₹12,000).
    • Total tax = ₹3,00,000 + ₹12,000 = ₹3,12,000.
• Uncommuted Pension:
  • The remaining 50% pension (₹15,00,000) is paid as a monthly annuity.
  • Annual pension = ₹15,00,000 ÷ 15 years (assumed annuity period) = ₹1,00,000 per year.
  • This ₹1,00,000 is taxable annually as salary under Mrs. Sunita’s income tax slab.

Alternate Scenario (No Gratuity):

• If Mrs. Sunita does not receive a gratuity, the exemption is one-half of the commuted value:
  • One-half of ₹30,00,000 = ₹15,00,000.
  • Since she commuted 50% (₹15,00,000), the entire commuted amount is exempt.
  • Taxable portion = ₹15,00,000 – ₹15,00,000 = ₹0.
  • No tax is payable on the commuted pension in this case.

Key Points to Note:

• The exemption under Section 10(13) applies only to payments from an approved superannuation fund.
• The commuted pension exemption depends on gratuity receipt (one-third or one-half).
• Uncommuted pensions (monthly or periodic payments) are fully taxable as salary.
• Payments received by legal heirs or nominees upon the employee’s death are generally exempt under Section 10(13), as they are treated as capital receipts, not income.
• The fund’s approval status can be verified with the employer or the Income Tax Department.