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5 special tax provisions for central government employees

Many Indian job seekers prefer government jobs over private employment. Even though private companies often offer better pay, government jobs are highly sought after. A lesser-known reason for this preference is overall tax implications.

Being in a government job allows you to avail of certain special tax provisions that aren't available to those working with private firms. Some of the special tax provisions for government employees include:

Leave encashment: While retiring, a government employee can get monetary compensation for any unused leave they earned throughout the time they worked with the company. What's more, the amount will be fully exempt from tax as no tax can be levied on leave encashment by a government employee on their retirement. In the case of private-sector employees, only a limited amount is exempt from tax. Also, it depends from firm to firm.

Pension: While pension paid in installments post-retirement is taxable for all employees across organizations, government employees have a benefit when they take a lump sum amount. Under the Income Tax Act, 1961, a special provision allows them to get a lump sum pension tax free at the time of their retirement.

Gratuity: Gratuity is the sum paid by employers on the retirement of employees as a note of thanks. This amount is available only to employees who have worked for more than five years at a particular company. While a gratuity is available to both public and private sector employees, those working in the government have an advantage as they don't have to pay tax on it. A gratuity paid on the retirement or death of a worker is exempted from taxes.

NPS: The National Pension Scheme has emerged as a good option for those looking to build a retirement fund using market-linked returns. While the scheme offers tax benefits to all contributors, those from the central government do get an additional advantage here too. Recently, the government announced that the contribution of employers in NPS for the central government would rise from 10% to 14%. Additionally, the government amended the Income Tax Act, 1961 section 80CCD(2), to allow government employees to claim an exemption on the entire 14% amount contributed by their employers to the NPS. This provision is currently not applicable to private sector employees.

Entertainment Allowance: Even though most private-sector employees don't get entertainment allowance anymore, central government employees continue to enjoy this allowance as well as special provisions for taxation on it. Government employees are allowed to deduct the allowance from their gross salary by using the minimum of actual allowance/ one-fifth of the salary (excluding any allowance, benefits or other perquisites) / ₹5,000. This helps in reducing their overall tax burden.

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