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Tax on retirement benefits

Tax treatment of various components of salary normally received by an employee at the time of retirements are as follows:

Provident Fund:
Lump sum payment received from Statutory Provident Fund received by the Central/State/Semi State Government employee is fully exempted from Income Tax u/s 10(12).

Gratuity:
In the case of Central/State/Semi State Government employee, Gratuity amount is exempt from Income Tax u/s 10(10)(i) of the Income Tax Act, 1961.
Commutation of Pension :
Commuted pension received by a employee who has joined the Central Government before 01.01.2004 and State/Semi State Government employee joined before 01.11.2005 is fully exempt from tax u/s 10(10A)(i).

Encashment of Leave Salary :
In the case of Central/State/Semi State Government employee, any amount received as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of retirement/superannuation is exempt from tax u/s 10(10AA)(i)

Dearness Allowance/Pension :
It is taxable. Even the arrears received is also taxable. However, in respect of arrears, assessee can claim a relief u/s 89(1).