As the filing season for Income Tax Returns (ITRs) for Assessment Year (AY) 2026-27 gathers pace, taxpayers are busy obtaining Form 16, reconciling the details reflected in their Annual Information Statement (AIS) and selecting the correct ITR form. However, one field that often escapes attention is the "Nature of Employment" field in the ITR, even though it can materially influence the availability and quantum of certain tax benefits.'Nature of Employment': More than a routine disclosureThe "Nature of Employment" field in the ITR requires every individual reporting income under the head "Salaries" to select the category applicable to him or her. The available options include:Central GovernmentState GovernmentPublic Sector Undertaking (PSU)Central Government PensionerState Government PensionerPSU PensionerOther PensionerOthersAt first glance, these categories may appear to be merely administrative disclosures. However, the selection of the correct employment or pensioner category can have important tax consequences.Also read: Salaried employees beware! These 5 mistakes during ITR filing can trigger unexpected tax demandsWhy the 'Nature of Employment' field mattersThe significance of selecting the correct employment or pensioner category becomes evident from the fact that the availability and quantum of several tax exemptions and deductions vary depending on the nature of employment. The following provisions of the Income-Tax Act, 1961 illustrate how the tax treatment of certain benefits differs across categories of employees and pensioners. Provision Nature of benefit Categories for quantification Provision Nature of benefit Categories for quantification Section 10(10) Gratuity Exemption (i) Central government, state government and local authority employees; (ii) Employees covered by the Payment of Gratuity Act, 1972; (iii) Other employees Section 10(10A) Commuted pension exemption (i) Central government, state government, local authority andpublic sector companyemployees (ii) Other employees Section 10(10AA) Leave encashment exemption (i) Central government and state government employees. (ii) Other employees Section 80CCD(2) Deduction for employer's contribution to NPS (i) Central government andstate government employees (ii) Other employees (1) Gratuity exemption: One benefit, three different tax treatmentsThe exemption available for gratuity under Section 10(10) varies significantly depending on the nature of employment.Government employeesFor central Government and state government employees, including defence personnel, members of the All India Services and employees of local authorities, retirement gratuity is generally fully exempt from tax.Also read: ITR filing 2026: 9 key checks every taxpayer must make for AY 2026–27Employees covered by the Payment of Gratuity Act, 1972For employees covered under the Payment of Gratuity Act, 1972, the exemption is limited to the least of:Actual gratuity received;Gratuity calculated under the provisions of the Payment of Gratuity Act, 1972 (15 days' wages for every completed year of service or part thereof in excess of six months, based on the last drawn wages); orRs 20 lakh, being the maximum limit notified by the central government (Notification No. S.O. 1420(E) dated March 29, 2018).Other Employees For other employees the exemption is limited to the least of:Actual gratuity received;One-half month's average salary for each completed year of service, calculated on the basis of the average salary drawn during the ten months immediately preceding retirement; orRs 20 lakh, being the limit notified by the central government (Notification No. S.O. 1213(E) dated March 8, 2019).The category selected in the "Nature of Employment" field therefore becomes crucial in determining the correct exemption available under Section 10(10).Also read: Pension is salary, family pension is not: Key tax rules pensioners must know before filing ITR for AY 2026-272. Commuted pension: Same benefit, different tax treatment across employee categoriesA similar distinction exists under Section 10(10A) in respect of commuted pension.For central and state government employees, employees of local authorities and employees of corporations established under a Central, State or Provincial Act (Public Sector Undertakings), the entire commuted pension received on retirement is generally exempt from tax.For other employees, the exemption is restricted to:One-third of the commuted value of pension, where gratuity is received; andOne-half of the commuted value of pension, where gratuity is not received.The difference in tax treatment can be significant, making the correct selection of the employment category in the ITR particularly important for retired employees receiving commuted pension benefits.Also read: Filing your ITR early for AY 2026–27? Why you should wait till June 153. Leave encashment: Same benefit, two different tax treatmentsThe tax treatment of leave encashment also depends on the nature of employment.Leave encashment received by central government and state government employees at the time of retirement is fully exempt from tax under Section 10(10AA).For other employees, the exemption is subject to prescribed conditions and limits. One of the key limits is the cash equivalent of earned leave standing to the employee's credit, subject to a maximum of ten months' leave calculated on the basis of the average salary drawn during the ten months immediately preceding retirement. In addition, the overall exemption cannot exceed Rs 25 lakh, as notified by the central government vide Notification No. S.O. 2276(E) dated May 24, 2023.The nature of employment therefore determines whether leave encashment is fully exempt or subject to statutory limits and prescribed calculations.4. NPS deduction: Same benefit, different deduction limitsThe relevance of the "Nature of Employment" field is not restricted to retirement benefits alone.Under Section 80CCD(2), the deduction available in respect of an employer's contribution to the National Pension System (NPS) also varies depending on the nature of employment and the tax regime opted by the taxpayer.For central government and state government employees, deduction is available up to 14% of salary in respect of the employer's contribution to NPS under both tax regimes.For other employees, the deduction is restricted to 10% of salary under the old tax regime. Under the new tax regime, the limit is 14% of salary.An incorrect selection of the employment category may result in a taxpayer claiming a higher or lower deduction than what is legally permissible.Before filing your ITR, verify these detailsThe income-tax return is increasingly becoming a data-driven document. The category of employment or pensioner status disclosed in the return can be cross-verified with information available in Form 16, TDS statements, salary schedules, pension disclosures and other reporting mechanisms.An incorrect selection of the "Nature of Employment" field may result in either an excess claim or a short claim of exemptions and deductions available under the Income-Tax Act.Taxpayers should therefore verify the following before submitting their ITR:The employment category selected in the ITR matches their actual employment status.Pensioners are classified under the correct pensioner category.Exemptions claimed, including those relating to gratuity, commuted pension and leave encashment, have been computed in accordance with the provisions applicable to their category.Deductions claimed, including under Section 80CCD(2), have been calculated using the correct limits.Any other exemption, deduction or tax benefit whose availability or quantum depends on the nature of employment has been correctly computed.A few moments spent verifying the "Nature of Employment" field can help ensure accurate tax computation, preserve legitimate tax benefits and avoid unnecessary disputes or compliance issues at a later stage.The author, O.P. Yadav, is a former IRS officer with over 36 years of experience in tax administration, education, and training. He is presently associated with Prosperr.io as a Tax Evangelist. The views expressed are personal.(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)