Whether employees of Government PSUs can be treated as Government employees for the purpose of income-tax exemptions on retirement benefits?
Whether employees of Government PSUs (Public Sector Undertakings) can be treated as Government employees for the purpose of income-tax exemptions on retirement benefits – such as gratuity, leave encashment, commutation of pension, etc.
Basic Principle:
Under the Income Tax Act, 1961, the term “Government employee” has a specific and narrow meaning – it refers only to employees of the Central Government or State Governments.
Employees of Public Sector Undertakings (PSUs) – even if wholly owned by the Government – are not treated as Government employees under the Income Tax Act. They are treated as employees of a company.
Key Retirement Benefits & Their Tax Treatment:
1. Gratuity [Section 10(10)]
| Category | Exemption Available |
| Central / State Government employees | Full exemption – entire gratuity is tax-free |
| Non-Government employees covered under Payment of Gratuity Act | Exempt up to ₹20 lakh (limit prescribed u/s 10(10)(ii)) |
| Non-Government employees not covered under the Act | Exempt up to ₹20 lakh or half month’s average salary for each completed year of service, whichever is less |
Therefore, PSU employees get exemption limited to ₹20 lakh, not full exemption.
2. Leave Encashment [Section 10(10AA)]
| Category | Exemption |
| Central / State Government employees | Fully exempt |
| Other employees (including PSU employees) | Exempt up to ₹25 lakh (as per CBDT Notification No. 31/2023 dated 24.05.2023) |
Hence, PSU employees get exemption up to ₹25 lakh only — not full exemption.
3. Commutation of Pension [Section 10(10A)]
| Category | Exemption |
| Government employees | Fully exempt |
| Non-Government employees (including PSU) | Exempt only up to 1/3rd (if pension is commuted from a fund not received gratuity) or 1/2 (if gratuity received) of full value of pension |
So, PSU employees get only partial exemption on commuted pension.
4. VRS Compensation [Section 10(10C)]
Available to all employees (including PSUs) subject to scheme approval and ₹5 lakh exemption limit.
So here, PSU employees can claim the same exemption as others.
Judicial and CBDT Clarifications:
1. CBDT Circular No. 573 dated 21.08.1990 clearly states that:
Employees of Public Sector Undertakings are not Government employees, even though their employer is a Government company.
2. Case Laws:
• ONGC vs. V. U. Warrier (2005) 279 ITR 379 (SC): PSU employees are not “Government servants”.
• Bharat Sanchar Nigam Ltd. vs. Pradeep Kumar Srivastava (2008) 11 SCC 579: PSU is a separate legal entity; its employees are not Government employees.
• LIC vs. CIT (1996) 219 ITR 410 (SC): LIC employees not considered Government employees for tax exemption purposes.
In Simple Words:
| Employer | Treated as “Government Employee”? | Consequence |
| Central / State Government | Yes | Full exemption on retirement benefits |
| PSU (like ONGC, SBI, LIC, NTPC, etc.) | No | Partial or limited exemption |
| Local Authority / University / Autonomous Body | No | Partial exemption as per limits |
Summary Table:
| Benefit | Govt Employee | PSU Employee |
| Gratuity | Fully exempt | Exempt up to ₹20 lakh |
| Leave Encashment | Fully exempt | Exempt up to ₹25 lakh |
| Commuted Pension | Fully exempt | Partially exempt |
| VRS | ₹5 lakh (if scheme approved) | ₹5 lakh (if scheme approved) |
Conclusion:
Employees of Public Sector Undertakings (PSUs) are not Government employees for purposes of the Income-tax Act.
Therefore, retirement benefits like gratuity, leave encashment, and commuted pension are not fully exempt – they are exempt only up to the monetary limits specified in the respective sections.
