1. Exemption of Death-Cum-Retirement Gratuity [Section 10(10)]
Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. Gratuity can either be received by:
the employee himself at the time of his retirement; or
the legal heir on the event of the death of the employee.
Gratuity received by an employee on his retirement is taxable under the head “Salary” whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head “Income from other sources”.
However, in both the above cases, according to section 10(10) gratuity is exempt upto a certain limit. Therefore, in case gratuity is received by employee, salary would include only that part of the gratuity which is not exempt under section 10(10) as discussed in the Table below :
Government employees & employees of local authority
|Employees covered under Gratuity Act.||Any other Employees|
Minimum of the following 3 limits:
Minimum of the following 3 limits:
Important Points :
Salary of 15 days is calculated by dividing salary last drawn by 26, i.e., maximum number of working days in a month. For instance, if monthly salary at the time of retirement is Rs. 2,500, 15 days’ salary would come to Rs. 1,442.31 [i.e., Rs. 2,500 × 15÷26].
2. Tax treatment of PENSION [Monthly and Commuted] for Computing Salary Income [Section 17(1)(ii)]
Pension is a payment made by the employer after the retirement/death of the employee as a reward for past service.
Pension is normally paid as a periodical payment on monthly basis but certain employers may also allow an employee to forgo a portion of the pension and receive a lump sum amount by surrendering such portion of pension. This is known as commutation of pension. The pension may be fully or partly commuted i.e. in lieu of the pension, a lump sum payment is made to the employee. The treatment of these two kinds of pension is as under:
- Uncommuted pension i.e. the periodical pension: It is fully taxable in the hands of all employees, whether government or non-government.
For instance, X gets monthly pension of Rs. 2,000. It is taxable as salary under section 15 in the hands of a Government employee as well as non Government employee.
- Commuted pension: Exemption of Commuted Pension U/s 10(10A)
|Status of Employee||
Gratuity Received / Not Received
|Exemption in respect of Commuted Pension under Section 10(10A)|
|Govt. employees, employees of local authorities and employees of statutory corporations||Gratuity may or may not be Received||Entire Commuted Pension is Exempt from Tax.|
|Non-Government Emplopyee||Gratuity Received||
1/3 rd of the Pension which he is normally entitled to receive is Exempt from tax.
|Non-Government Emplopyee||Gratuity is Not Received||
1/2 of the Pension which he is normally entitled to receive is Exempt from tax.
If payment in Commutation of Pension received by an employee exceeds the aforesaid limits, such excess is liable to tax in the assessment year relevant to the previous year in which it is due or paid. The assessee can, however, claim relief in terms of section 89.
3. Leave Encashment [Section-10(10AA)] for Computing Salary Income
As per terms of employment, generally, an employee is granted certain period of leave(s) on yearly basis. Such leave(s) may be casual leaves, medical leaves and privileged leaves or earned leaves. Generally, an employee can accumulates his medical leaves and privileged leaves and can avail such leaves in subsequent years as per his necessity.
However, in some cases, an employee can even encash his accumulated privileged/earned leaves and can get salary for the said period of leave. Such receipt of salary by an employee from his employer in lieu of his accumulated leaves is called “Leave Encashment”.
Such encashment can be done by an employee either during the service or at the time of leaving job due to retirement or any other reason. However, in case of death of an employee, the salary for his/her accumulated leave is given to his/her legal heirs.
(A) Leave Encashment during service.
Any encashment of leaves by an employee during continuance of service is “fully taxable” for all employees whether government employees or non- government employees. Such encashment may either be of current year leaves or of past accumulated leaves. It is taxable as salary income of the employee for the previous year in which amount is received by employee.
(B) Leave Encashment on Leaving Job / Retirement
(BI) For Government Employees [Section 10(10AA)(i)].
Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be “Fully Exempt” u/s 10(10AA)(i).
Meaiuing of Government Employee. Government employee includes
- Employees of Central Government
- Employees of state Government
Note : Employees of Local Authority, Statutory Corporation and Public Sector Undertakings are not regarded as Government Employees for this purpose.
(BII) For Non-Government Employees [Section 10(10AA)(ii)].
Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be exempt upto the least of following amounts Under Section 10 (10AA)(ii).
Minimum of the following four limits:
- Leave encashment actually received; or
- 10 months average salary; or
- Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of actual service rendered; or
- Rs. 3,00,000
Meaning of salary :
- Basic salary plus D.A. to the extent the terms of employment so provide plus Commission, if fixed percentage of turnover.
- Average salary of last 10 months immediately proceeding the date of retirement.
C. Leave Encashment after Death.
In case the amount of leave encashment is given to legal heirs of deceased employee, it will be Fully Exempt.
4. Retrenchment Compensation received by Workmen [Section 10(10B)]
Any compensation received by a workman at the time of his retrenchment, under the Industrial Disputes Act, 1947 or under:
any other Act or rules or any order or notification issued there under; or
any standing order; or
any award, contract of service or otherwise,
shall be exempt to the extent of minimum of the following limits:
Actual amount received;
15 days’ average pay for every completed year of service or part thereof in excess of 6 months;
Amount specified by the Central Government, i.e. ₹. 5,00,000.
Compensation received in excess of the aforesaid limit is taxable and would, therefore, form part of Gross Salary. However, the assessee shall be eligible for relief under section 89 read with rule 21A.
5. ‘Retirement Compensation’ from a Public Sector Company or any other Company is Exempt from Tax [Section 10(10C)]
The compensation received or receivable by the employee of the following, on voluntary retirement, under the golden hand shake scheme, is exempt under section 10(10C):
a public sector company; or
any other company; or
an authority established under a Central, State or Provincial Act; or
a local authority; or
a co-operative society; or
a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956; or
an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961; or
such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf;
Institutions having importance throughout India or in any State or States as may be notified.
Exemption shall be available, subject to the following conditions:
The compensation is received only at the time of voluntary retirement or termination of his services in accordance with any scheme or schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation. Even if the compensation is received in instalments, the exemption shall be allowed.
Further, the scheme of the said companies or authorities or societies or universities or the institutes referred to in clauses (vii) and (viii) above, as the case may be, governing the payment of such amount, are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed. In the case of public sector companies, if there is a scheme of voluntary separation, it shall also be according to the said prescribed guidelines.
Quantum of Exemption:
- The amount of exemption is the actual amount of compensation received
- or ₹. 5,00,000,
whichever is less.
6. National Pension Scheme [ NPS] for Central Government and other Employees joining new jobs on or after 1-1-2004
Central Government of India introduced a New Pension Scheme for its employees who would join the service on or after 1-1-2004 and now this scheme is also applicable in case of other employees. Under this scheme, the employee is required to contribute 10% of his salary towards notified pension account and it is mandatory for the employer also to contribute 10% of employee’s salary towards this fund. The salient features of NPS scheme is as follows : –
7. Deduction in respect of Contribution to a National Pension Scheme (NPS) [Section 80CCD]
The following are salient features of Section 80CCD :
(1) Deduction of an Employee’s/ Assessee’s Contribution [Section 80CCD(1)]:
The deduction under this section is allowed to—
The deduction is allowed on account of—
(2) Deduction of Rs. 50,000 under Section 80CCD(1B):
The employee or the individual referred to in section 80CCD(1), shall be allowed a deduction in computation of his total income, [whether or not any deduction is allowed under section 80CCD(1)] to the extent of—
(3) Deduction of Employer’s Contribution [Section 80CCD(2)]:
Any amount contributed by the employer (i.e. Central Government or any other employer) to such pension scheme shall be allowed as deduction for an amount not exceeding 20% of the salary of the employee in the previous year.
(4) Tax treatment of NPS [Section 80CCD(3)] :
– The amounts standing to the credit of an assessee in NPS, for which a deduction has already been claimed by the assessee, and accretions to such account, shall be taxed as follows –
8. Tax Planning for Retirement of the Employee
The employee can receive the following retirement benefits from his employer:
- If the gratuity is received by an employee under the Payment of Gratuity Act, 1972, it shall be exempt to the extent of minimum of the following 3 limits:
- Actual Gratuity received.
- 15 days salary for each completed year of service or part thereof exceeding 6 months.
- Rs. 10,00,000.
‘Salary’ for this purpose will include dearness allowance and it will be last drawn salary.
- In any other case, the gratuity shall be exempt to the extent of minimum of the following 3 limits:
- Actual gratuity received.
- Half months average salary of each completed year of service.
- Rs. 10,00,000.
Salary for this purpose shall include Dearness allowance if the terms of employment so provide.
– Further, if a fixed percentage of commission on turnover is given it shall be included due to the Supreme Court case. Average salary here means average of the above salary for the last ten months immediately proceeding the month in which the event occurs.
2. Commuted Pension.—
- If an employee receives uncommuted pension, it is taxable, but there is some exemption in case of commuted pension.
- The commuted pension in case of Government employee of local authority & employees of corporation, if the commutation is as per their rules, shall be fully exempt.
- In case of any other employee, it shall be exempt to the extent of ..
- – commuted value of 50% of the normal pension in case the employee is not in receipt of gratuity.
- – The exemption shall be 1/3rd in case he is in receipt of gratuity as well.
3. Leave Encashment.—
Encashment of accumulated leave to the Government employee at the time of retirement on superannuation or otherwise shall be fully exempt.
In case of any other employee, the exemption shall be to the extent of the minimum of the following limits:—
(1) Actual encashment received.
(2) Cash equivalent to the unavailed leave calculated on the basis of maximum 30 days leaves for each completed year of service.
(3) 10 months average salary.
(4) Rs. 3,00,000.
Salary for this purpose shall have same meaning as is given in case of gratuity above. Average salary means average of the salary of last 10 months immediately proceeding the retirement.
4. Payment for RPF:
- If the payment is received by an employee after 5 years of continuous service, it shall be fully exempt.- Further, if the payment is received before 5 years due to ill health or disablement or death of the employee or due to any reason beyond his control, it shall also be exempt.
- If the payment is received before 5 years, then the employees contribution plus interest thereon till date shall be taxable as ‘profits in lieu of salary’. Interest on employees contribution shall be taxable under the head ‘income for other sources’.
5. Retrenchment Compensation:
Any retrenchment compensation received by an employee under the Industrial Disputes Act or under an order or award or settlement of Court, shall be exempt.
6. Compensation received Under Voluntary Retirement Scheme:
Any compensation received/ receivable by an employee under an approved Voluntary Retirement Scheme shall be exempt to the maximum extent of Rs. 5,00,000.