My client has commuted part of his pension from a private employer's scheme and received a lump sum. How much of it is exempt, and does it make any difference that he also drew gratuity?
It makes all the difference. Under s.10(10A)(ii) a payment in commutation of pension received under any scheme of any other employer is exempt only to the extent of the commuted value of one-third of the pension he is normally entitled to receive where he receives any gratuity, and the commuted value of one-half of such pension in any other case. Under s.10(10A)(i) the commuted pension is exempt without any limit at all for the classes listed there — which include not only Central and State Government servants and the all-India and defence services but also employees of a local authority and of a corporation established by a Central, State or Provincial Act — and under s.10(10A)(iii) any payment in commutation of pension received from a fund under clause (23AAB) is exempt without limit.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2025-04-01, reported as Section 10(10A) of the Income-tax Act, 1961, as amended up to 2025. It bears on section 10(10A), section 10(10A)(i), section 10(10A)(ii), section 10(10A)(iii), section 10(23AAB), section 10(10AA) of the Income Tax Act 1961, in Salary & Perquisites and Capital Gains Exemptions matters.
The clause carries no rupee ceiling at all, which makes it the odd one out in this part of section 10 and means that the whole argument is about which limb applies and, within limb (ii), about the fraction. Three points repay attention. First, the class in limb (i) is wider than "government": the words "or a corporation established by a Central, State or Provincial Act" bring in employees of statutory corporations, and whether a particular employer is a corporation established by an Act — as against a company incorporated under the Companies Act, however wholly owned by the State — is the question that decides the case. This is the same fault line the Delhi High Court dealt with under s.10(10AA) in Kamal Kumar Kalia v Union of India, already in this library, and a practitioner should expect the Revenue to argue it the same way here. Second, within limb (ii) the fraction is one-third if the employee receives any gratuity and one-half if he does not; the words are "any gratuity", so a small gratuity costs the client the difference between a third and a half of the commuted value. Third, the exempt amount is not the lump sum actually paid but the "commuted value" of the stated fraction of the pension he is normally entitled to receive, that value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality — so the computation is actuarial and starts from the full pension entitlement, not from the cheque. Note also what the clause does not do: it exempts a payment in commutation of pension, not the pension itself, and an uncommuted pension remains chargeable as salary. Finally, on the reach of limb (ii), the ITAT Chandigarh has held in Arun Dhir v DCIT that the clause nowhere confines the benefit to payments received on superannuation or retirement; that decision is entered separately in this library.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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As printed on the Year 2025 departmental page, clause (10A) of section 10 reads: (i) any payment in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the defence services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or a corporation established by a Central, State or Provincial Act ; (ii) any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed— (a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and (b) in any other case, the commuted value of one-half of such pension, such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality ; (iii) any payment in commutation of pension received from a fund under clause (23AAB). The same words are printed on the Year 2018 page, and on that page clause (10A)(iii) is followed immediately by clause (10AA), with no Explanation to clause (10A) in between.
Commuted pension is exempt without any monetary ceiling under s.10(10A)(i) for the classes listed there, which include employees of a local authority and of a corporation established by a Central, State or Provincial Act, and under s.10(10A)(iii) where the payment comes from a fund under clause (23AAB). For any other employer's scheme, s.10(10A)(ii) exempts only the commuted value of one-third of the pension normally receivable where the employee receives any gratuity, and the commuted value of one-half where he does not, that value being determined by reference to the recipient's age, the state of his health, the rate of interest and officially recognised tables of mortality. Clause (10A) contains no Explanation and no rupee limit.
Not applicable — this is a statement of statutory text taken from two departmental editions of section 10. No judicial reasoning is involved.
(a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and (b) in any other case, the commuted value of one-half of such pension,
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Handle my notice → Ask a CA on WhatsAppIt makes all the difference. Under s.10(10A)(ii) a payment in commutation of pension received under any scheme of any other employer is exempt only to the extent of the commuted value of one-third of the pension he is normally entitled to receive where he receives any gratuity, and the commuted value of one-half of such pension in any other case. Under s.10(10A)(i) the commuted pension is exempt without any limit at all for the classes listed there — which include not only Central and State Government servants and the all-India and defence services but also employees of a local authority and of a corporation established by a Central, State or Provincial Act — and under s.10(10A)(iii) any payment in commutation of pension received from a fund under clause (23AAB) is exempt without limit. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(10A), section 10(10A)(i), section 10(10A)(ii), section 10(10A)(iii), section 10(23AAB), section 10(10AA) of the Income Tax Act 1961. It is reported as Section 10(10A) of the Income-tax Act, 1961, as amended up to 2025. The clause carries no rupee ceiling at all, which makes it the odd one out in this part of section 10 and means that the whole argument is about which limb applies and, within limb (ii), about the fraction. Three points repay attention. First, the class in limb (i) is wider than "government": the words "or a corporation established by a Central, State or Provincial Act" bring in employees of statutory corporations, and whether a particular employer is a corporation established by an Act — as against a company incorporated under the Companies Act, however wholly owned by the State — is the question that decides the case. This is the same fault line the Delhi High Court dealt with under s.10(10AA) in Kamal Kumar Kalia v Union of India, already in this library, and a practitioner should expect the Revenue to argue it the same way here. Second, within limb (ii) the fraction is one-third if the employee receives any gratuity and one-half if he does not; the words are "any gratuity", so a small gratuity costs the client the difference between a third and a half of the commuted value. Third, the exempt amount is not the lump sum actually paid but the "commuted value" of the stated fraction of the pension he is normally entitled to receive, that value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality — so the computation is actuarial and starts from the full pension entitlement, not from the cheque. Note also what the clause does not do: it exempts a payment in commutation of pension, not the pension itself, and an uncommuted pension remains chargeable as salary. Finally, on the reach of limb (ii), the ITAT Chandigarh has held in Arun Dhir v DCIT that the clause nowhere confines the benefit to payments received on superannuation or retirement; that decision is entered separately in this library. If it applies to you, the first step is this: Identify the employer's legal form before anything else. A corporation established by a Central, State or Provincial Act puts the client in limb (i) and the commuted pension is exempt without limit; a company incorporated under the Companies Act does not, whoever owns it.
As printed on the Year 2025 departmental page, clause (10A) of section 10 reads: (i) any payment in commutation of pension received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the defence services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or a corporation established by a Central, State or Provincial Act ; (ii) any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed— (a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and (b) in any other case, the commuted value of one-half of such pension, such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality ; (iii) any payment in commutation of pension received from a fund under clause (23AAB). The same words are printed on the Year 2018 page, and on that page clause (10A)(iii) is followed immediately by clause (10AA), with no Explanation to clause (10A) in between. The matter was decided on 2025-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Commuted pension is exempt without any monetary ceiling under s.10(10A)(i) for the classes listed there, which include employees of a local authority and of a corporation established by a Central, State or Provincial Act, and under s.10(10A)(iii) where the payment comes from a fund under clause (23AAB). For any other employer's scheme, s.10(10A)(ii) exempts only the commuted value of one-third of the pension normally receivable where the employee receives any gratuity, and the commuted value of one-half where he does not, that value being determined by reference to the recipient's age, the state of his health, the rate of interest and officially recognised tables of mortality. Clause (10A) contains no Explanation and no rupee limit.
Not applicable — this is a statement of statutory text taken from two departmental editions of section 10. No judicial reasoning is involved. In the words reproduced by the source cited on this page: "(a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and (b) in any other case, the commuted value of one-half of such pension,"
It was decided by the CBDT Circulars & Instructions on 2025-04-01 and is reported as Section 10(10A) of the Income-tax Act, 1961, as amended up to 2025. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(10A), section 10(10A)(i), section 10(10A)(ii), section 10(10A)(iii), section 10(23AAB), section 10(10AA), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Commuted pension is exempt without any monetary ceiling under s.10(10A)(i) for the classes listed there, which include employees of a local authority and of a corporation established by a Central, State or Provincial Act, and under s.10(10A)(iii) where the payment comes from a fund under clause (23AAB). For any other employer's scheme, s.10(10A)(ii) exempts only the commuted value of one-third of the pension normally receivable where the employee receives any gratuity, and the commuted value of one-half where he does not, that value being determined by reference to the recipient's age, the state of his health, the rate of interest and officially recognised tables of mortality. Clause (10A) contains no Explanation and no rupee limit. It arises in Salary & Perquisites and Capital Gains Exemptions matters, on section 10(10A), section 10(10A)(i), section 10(10A)(ii), section 10(10A)(iii), section 10(23AAB), section 10(10AA) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If limb (ii) applies, establish whether the client received any gratuity — from this employment, in connection with this retirement. If he did, the fraction is one-third; if he did not, it is one-half. Compute the commuted value of that fraction of the pension he is normally entitled to receive, using the age, health, interest rate and recognised mortality tables the clause names, and get the scheme's or the insurer's commutation working on the file. Do not simply exempt a third or a half of the lump sum. Keep the uncommuted pension out of the claim. Section 10(10A) exempts a payment in commutation of pension; the monthly pension that continues is salary. If the payment came from a fund referred to in clause (23AAB) of section 10, take limb (iii) and claim the whole of it, and put the fund's approval on the file. Do not assume the payment must have been received at superannuation. Arun Dhir v DCIT (ITAT Chandigarh, 11 September 2025) holds the clause imposes no such precondition; cite it if the Assessing Officer reads one in.
Still good law. Two published editions seven years apart print clause (10A) in identical words, and the Department's current explanatory material, amended on its face up to the Finance Act 2026, describes the same three-way treatment. That is the best evidence obtainable here that the clause is unchanged for tax years up to AY 2026-27. No Finance Act text was read and no amendment footnote against clause (10A) could be found, so the clause's legislative history is not established here. No systematic check of judicial treatment of s.10(10A) was carried out; the only decision on it read for this entry was Arun Dhir v DCIT (ITAT Chandigarh, 11 September 2025), which is entered separately. Two qualifications follow. Because the legislative history is not established, this entry cannot say whether the fractions in sub-clause (ii) have always stood at one-third and one-half, and an assessment for an old year should be worked from the clause as it stood then rather than from this statement. And because clause (10A) has no Explanation, an argument that borrows the earned-leave Explanation to clause (10AA) to read words into it is answered on the face of the statute. That is the single most useful thing on this page, and it is worth stating in terms in any reply that meets such an argument, with both sub-clauses set out side by side so that the difference is on the face of the reply and the officer can see it without going to the Act. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Sourcing. Clause (10A) was transcribed in full from a published text of the Income-tax Act, 1961 printing the heading "Incomes not included in total income". A fabrication was caught and corrected in the course of preparing this entry, and a reader should know about it. The first reading of that text broke off immediately after sub-clause (10A)(iii) at the words "Explanation.—For the purposes of sub-clause (ii),—", and a second reading then supplied, under the label of an Explanation to clause (10A), the text of the Explanation to clause (10AA), which is the thirty-days-per-year of earned leave rule. To test that, an earlier edition was read for the continuous run of text between the start of clause (10A) and the start of clause (10B) with nothing omitted; it shows clause (10A)(iii) followed immediately by clause (10AA)(i), with nothing in between. It is therefore stated expressly that clause (10A) has no Explanation, and the words that came back under that label belong to clause (10AA). Clause (10A) itself is printed identically in both editions. The Department's own current explanatory material on the taxability of retirement benefits, which states on its face that it is amended up to the Finance Act 2026, prints the same three-way treatment: full exemption for an employee of the Central Government, a State Government, a local authority and a statutory corporation; one-third where gratuity is also received; and one-half where it is not. What could not be done: neither edition carried any amendment footnote against clause (10A), so the clause has not been dated, and nothing is said about when the one-third and one-half fractions were set or what, if anything, they replaced. The text of clause (23AAB) has not been read and nothing is said about its conditions. 'decided_on' is a labelled placeholder set to the start of the tax year matching the more recent of the two editions; it is not a decision date. 'bench' and 'favours' are inapplicable to a statutory entry. Two points of substance follow from the structure of the clause. The three sub-clauses are not alternatives an assessee may choose between: sub-clause (i) is confined to the employees it names, and sub-clause (ii) reaches a payment under any scheme of any other employer, so the first question in every case is which sub-clause the employer falls under. And within sub-clause (ii) the fraction turns on a single fact, whether gratuity is also received, which has to be established from the employer's records; where the order or the assessment makes no finding on it, no fraction can be applied, and an entry that assumes one has assumed the case. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Commuted pension is exempt without any monetary ceiling under s.10(10A)(i) for the classes listed there, which include employees of a local authority and of a corporation established by a Central, State or Provincial Act, and under s.10(10A)(iii) where the payment comes from a fund under clause (23AAB). For any other employer's scheme, s.10(10A)(ii) exempts only the commuted value of one-third of the pension normally receivable where the employee receives any gratuity, and the commuted value of one-half where he does not, that value being determined by reference to the recipient's age, the state of his health, the rate of interest and officially recognised tables of mortality. Clause (10A) contains no Explanation and no rupee limit.
TaxSphere, “Statutory position — s.10(10A): commuted pension, why a corporation established by an Act is on the government side of the line, and the one-third / one-half rule that turns on gratuity”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-section-10-10a-commuted-pension-one-third-and-one-half/ (validity last checked 2026-09-09)
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My client took a lump sum from his employer's pension policy in lieu of his pensionary rights and joined another group. The Assessing Officer says s.10(10A) only applies on superannuation and that in any event the client never appealed the assessment, so a s.154 application is not open to him. Is there anything I can do?
My client received a payment from a former employer that is not gratuity, not retrenchment compensation and not under any VRS. The Assessing Officer says it is profits in lieu of salary. What exactly does s.17(3) cover, and what does it not?
My client resigned; he did not superannuate. The officer says s.10(10AA) is only for retirement, so his leave encashment is fully taxable. Is that right?
For the s.10(10) gratuity and s.10(10AA) leave encashment limits, can I compute 'salary' on the pay my employer actually used — basic plus all the allowances that went into provident fund pay?
