Treatment of RPF/Annuity/Gratuity in the hands of Employee

Geetanjali Pandey | Last updated: 15 May 2023

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This article clarifies how Recognised Provident Fund (RPF), Annuity, and Gratuity payments are treated for employees under Indian tax law. It details exemptions available under Section 10 of the Income Tax Act and explains when interest or employer contributions might become taxable. The article also touches upon the tax treatment of these funds from the perspective of the trust itself.

This Article is aimed at providing knowledge about the treatment of RPF/Annuity/Gratuity in the hands of Employee and also discuss the treatment of income in the hands of approved recognized Provident Fund Trust/ Provident Fund to which PF Act, 1925 applies/approved Superannuation fund Trust/ Approv

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FAQ :

The accumulated balance in an RPF account payable to an employee is generally exempt under Section 10(12) of the Income Tax Act. However, the interest earned on this balance can be taxable if it exceeds specified limits.

The 'Taxable Contribution account' includes contributions made from the financial year 2021-22 onwards that exceed certain thresholds. For contributions including employer's share, the threshold is Rs. 2,50,000; for employee-only contributions, it's Rs. 5,00,000. Interest on contributions above these limits is taxable.

An employer's annual contribution exceeding 10% of the employee's salary in a recognised provident fund is taxable as 'Salary' under Section 17(1)(vi). Additionally, if the total employer contribution to RPF, NPS, and superannuation funds exceeds Rs. 7,50,000 annually, it's taxable as a perquisite.

Gratuity received by employees covered under the Payment of Gratuity Act, 1972, is exempt up to the least of Rs. 20 lakhs, the actual gratuity amount, or (last drawn salary * completed years of service * 15/26). For those not covered, the limit is the least of Rs. 10 lakhs, the actual gratuity, or a specific formula involving average salary.

No, income received by trustees on behalf of a Recognised Provident Fund, Approved Superannuation Fund, and Approved Gratuity Fund is exempt from tax under Section 10(25) of the Income Tax Act.