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|
|Fully Exempt||Minimum of the following 3 limits: |
1. Actual gratuity received, or
2. 15 days salary for every completed year, or part thereof exceeding 6 months 7 days salary for each season in case of employee in seasonal establishment; or
3. ₹. 10,00,000
Meaning of Salary:
i. Basic salary plus dearness allowance.
ii. Last drawn salary. Average salary for preceding 3 months in case of piece rates employees
iii. No. of days in a month to be taken as 26
|Minimum of the following 3 limits: |
1. Actual gratuity received
2. Half months average salary of each completed year of service.
3. ₹. 10,00,000
Meaning of Salary:
i. Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.
ii. Average salary of last 10 months preceding the month in which event occurs.
iii. Only completed year of service is to be taken.
Important Points :
- Where an employee had received gratuity in any earlier year(s) and had claimed exemptions under section 10(10) in respect of the gratuity received earlier also, he will still be entitled to this exemption but the limit which at present is Rs. 10,00,000 shall be reduced by the amount of exemption(s) availed in the earlier year(s). There will be no change in the other two limits.
- The words “completed service” occurring in section 10(10) should be interpreted to mean an employee’s total service under different employers including the employer other than the one from whose service he retired, for the purpose of calculation of period of years of his completed service, provided he was not paid gratuity by the former employer.
- Any gratuity paid to an employee, while he continues to remain in service with the same employer is taxable under the head “Salaries” because gratuity is exempt only on retirement or on his becoming incapacitated or on termination of his employment or death of the employee. In this case, however the assessee can claim relief under section 89.
- The expression “termination of employment” would cover an employee who has resigned from the service.
- How to determine 15 days’ salary – 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].
- How to determine 15 days’ salary for each year of service in the case of a piece-rated employee – In the case of a piece rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the retirement. For this purpose, the wages paid for any overtime work shall not be taken into account.
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.
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 Employee||Gratuity Received||1/3 rd. of the Pension which he is normally entitled to receive is Exempt from tax.|
|Non-Government Employee||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.
|Note : |
1. Pension received by the employee is taxable under the head “Salaries”.
2. Pension is received from UNO by the employee or his family members : It is not chargeable to tax
3. Family pension received by the family members of armed forces : It is exempt under section 10(19) in some cases.
4. Family pension received by the family members after the death of an employee : It is taxable in the hands of recipients under section 56 under the head “Income from other sources”. Standard deduction is available under section 57 which is 1/3 of such pension or Rs. 15,000, whichever is lower.
3. Tax treatment of Leave Salary, Leave Encashment at the time of Retirement U/s 10(10AA)
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
(B1.) 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.
(B2.) 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 :|
1. Basic salary plus D.A. to the extent the terms of employment so provide plus Commission, if fixed percentage of turnover.
2. 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.
- Meaning of Non-Government Employees. Non-government employees includes all employees other than employees of Central Government and State Government.
- Meaning of Salary. It shall mean Basic Salary, Dearness Allowance (if given under the terms of employment or if it enters into pay for retirement benefits) and commission as fixed percentage of turnover achieved by him. Then,
Salary = Basic Salary + D.A. (enters)/D.P + Commission on Turnover
- Calculation of Average Salary of 10 months. Average salary of 10 months is to be calculated on the basis of the average salary drawn by the employee during the period of 10 months immediately preceeding his retirement whether on superannuation or otherwise.
Example 1: If employee retires on December 31, 2013 then average salary of 10 months will be calculated by taking salary drawn during March 1, 2013 to December 31, 2013:
Example 2 : If employee retires on December 15, 2013 then average salary of 10 months will be calculated by taking salary drawn during the period March 16, 2013 to December 15, 2013.
- Meaning of Approved Period of Leave : Approved Period of Leave = 30 days/ 1 month leave for every completed year of service. Note. Service period in fraction of the year (whatsoever it may be) shall be ignored, i.e., shall not be taken into consideration while calculating total approved period of leave on the basis of service period.
- Earning of Approved leave(s) left on leaving job
It shall be calculated as follows :
The approved leave(s) on the basis of completed year of service = x x x x
Less : Leave(s) taken during service = x x x x
Less : Leave(s) encashed during service = x x x x
Approved leave(s) left on leaving job = x x x x
- Whole life exemption limit. The notified maximum exemption limit of Rs. 3,00,000 is a whole life exemption limit for an employee in respect of leave encashment received at the time of leaving job. It can be explained as follows :
- If employee receives leave encashment for the 1st time in his life at the time of leaving job:
While calculating exemption, the maximum notified limit of Rs. 3,00,000 shall be applicable and he shall be granted exemption as per the least of 4 limits.
- If employee receives leave encashment for the second/third or subsequent times:
While calculating exemption in respect of leave encashment on subsequent occasions, the maximum notified exemption limit shall be reduced by the exemption claimed in the past.
Maximum Exemption Limit on subsequent Occastions = Maximum Notified Limit of Rs. 3,00,000 – Exemption Claimed in past
- If employee receives leave encashment for the 1st time in his life at the time of leaving job:
- Receipt of leave encashment simultaneously from two or more employers in same P.Y.
- In such a case, the maximum exemption in respect of leave encashment received from all the employers cannot exceed the maximum notified limit of Rs. 3,00,000.
- Relief u/s 89(1). In respect of taxable leave encashment included in salary income of any previous year, the employee is entitled to claim relief u/s 89(1).
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.
|1. Where retirement compensation is received by a workman in accordance with any scheme which the Central Government having regard to the need for extending special protection to the workman in the undertaking to which such scheme applies, has approved in this behalf, the entire amount of compensation so received shall be exempt under section 10(10B).|
2. Where retrenchment compensation received by a workman exceeds the amount which qualifies for exemption under the new clause, he will be entitled to relief under section 89 read with rule 21A of the Income-tax Rules, in respect of such excess.
5. Compensation received on Voluntary Retirement [Section 10(10C)]
The compensation received or receivable by the employee from a Public Sector Company or any other Company 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;
- State Government;
- Central Government;
- 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.
|1. The exemption is available to an employee only once and if it has been availed for an assessment year it shall not be allowed to him for any other assessment year.|
2. The assessee shall not be eligible for relief under section 89 in case he has claimed exemption under section 10(10C). On the other hand, if he claims relief under section 89, he cannot claim exemption under section 10(10C).
6. Tax treatment of National Pension Scheme [ NPS] with Deduction under Section 80CCD
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 : –
- Contribution by the employer to NPS is first included under the head “Salaries” in hands of the employee.
- Such contribution is deductible (to the extent of 10 per cent of the salary of the employee) under section 80CCD(2).
- Employee’s contribution to NPS (to the extent of 10 per cent of the salary of the employee) is also deductible under section 80CCD(1).
- When pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of the recipient
- “Salary” for the purpose of points 1 and 2 (supra) includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites. It also includes commission if commission is payable at a fixed percentage of turnover achieved by an employee.
- The aggregate amount of deduction under sections 80C, 80CCC and 80CCD(1) [i.e., contribution by employee (or any other individual) towards NPS] cannot exceed Rs. 1,50,000.
- Moreover, from the assessment year 2016-17, the employee (or any other individual who has joined NPS) can contribute an additional amount (up to Rs. 50,000) towards NPS and claim the same as deduction under section 80CCD(1B).
Contribution under section 80CCD(1B) is not covered by cumulative ceiling which is given in point No. 6 (infra).
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—
- an assessee who is an individual and is employed by the Central Government on or after 1-1-2004 or by any other employer (the date of employment with other employer is not relevant), or
- any other assessee being an individual.
- any amount not exceeding 10% of salary of the previous year paid or deposited by the employee in his account under the notified pension scheme;
- any amount contributed by any other assessee being an individual to such pension scheme not exceeding 20% of his gross total income in the previous year.
(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—
- the whole of the amount paid or deposited in the previous year, or
- Rs. 50,000 whichever is less. However, no deduction under section 80CCD(1B) shall be allowed in respect of the amount on which a deduction has been claimed and allowed under section 80CCD(1).
(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 –
|1. Partial withdrawal from NPS (to the extent it does not exceed 25% of an employee’s contribution)||Exempt|
|2. Amount received by an employee [or a non-employee (applicable from the assessment year 2019-20)] on closure of his account or on his opting out of the NPS||40% Exempt|
|3. In (2), amount is received by a nominee on the death of the assessee||Exempt|
|4. Pension received out of NPS||Taxable|
|5. Amount received in (2), (3), (4) is utilized for purchasing an annuity plan in the same previous year||Exempt|
|6. Pension received out of annuity plan purchased in (5)||Taxable|
|What is “salary” –|
For calculating 10 per cent limit for the above purpose, “salary” includes dearness allowance, if the terms of employment so provide and commission (if commission is calculated at a percentage of turnover achieved by an employee). However, it excludes all other allowances and perquisites (in other words, “salary” for this purpose has the same meaning which is applicable in the case of house rent allowance).