Income Tax Exemption in Respect of retirement benefits

Deepika Rathore

Article is focusing on Tax Treatment of Various  retirement benefits i.e Gratuity, Leave Encasement, Commuted Pension, Uncommuted Pension, Statutory Provident Fund, Recognised Provident Fund and Unrecognised Provident Fund. 

GRATUITY 

Gratuity is a payment made by Employer to an Employee in appreciation of the Past Services Rendered By the Employee.Gratuity can Either be Received by:-

a) The Employee Himself at the Time of Retirement

b) 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”.

As Per Payment of gratuity Act 1972 Gratuity Shall be Payable to an employee on the termination of his Employment after he has rendered continuous Service for not less than 5 Years:-

a) on Superannuation

b) on Retirement or Resignation

c) on Death or Disablement due to accident or Disease

However , the Completion of Continuous Service of 5 Years shall not be necessary where the Termination of the Employment of any Employee is due to Death or Disablement.

EXEMPTION OF GRATUITY UNDER SECTION 10(10)

Government Employees & Employees of Local Authority		Employees Covered under Gratuity Act	Any other Employees/Employees not Covered under Grauity Act
Fully Exempt		Minimum of the following three limits:- 1) Actual Gratuity Received 2) 15/26*last drawn Salary*Completed Year of service 3) Rs. 20,00,000 Salary Means:-Basic + *Dearness Allowance *whether forming part of retirement benefit or not Completed Year of Service:- More than 6 Months Shall be Taken as Completed Year. A Period of 6 Months or Less than 6 Months shall be ignored.	Minimum of the following three limits:- 1) Actual Gratuity Received 2) 1/2*Average Salary *Completed Year of Service 3) Rs. 20,00,000 Salary Means:-Basic Pay+Dearness Allowance(to the extent forming part of retirement benefits)+Commission(Fixed  Percentage of Turnover) Average Salary Means:-Average  Salary of Last 10 Months  Preceding the Month in Which Retirement occurs. Completed Year of Service:- A Period of 6 Months or Less than 6 Months shall be ignored.

NOTES:-

1. Where an Assessee had Received Gratuity in any Earlier Years and had Claimed Exemption 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 20,00,000 shall be reduced by the Amount of exemption availed in earlier Year.  If Gratuity is Received from More than one Employer in the Same Previous Year, by an Employee the Limit of Rs. 20,00,000 Would Apply to the Aggregate of Gratuity Received  from one or more Employers.

2. The word “Completed Service” occurring in Section 10(10) should be interpreted to mean an employee’s total service under different employer, provided he was not paid
Gratuity by former employer.

3. Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax (Circular No. 573 dated 21.8.90).

PENSION

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 on Monthly Basis but Employees can also receive a lum sum amount by Surrendering such portion of pension ,this is known as Commutation of Pension

UNCOMMUTED PENSION

It is Fully Taxable in the Hand of all Employees,Whether Government or Non Government.

EXEMPTION OF COMMUTED PENSION UNDER SECTION 10(10A)

Government Employees & Employees of Local Authority and Employees of Statutory Corporation	Any other Employees
FULLY EXEMPT	If Gratuity is not Received 1/2 of Normal Pension is Exempt If Gratuity is  Received 1/3 of Normal Pension is Exempt Normal Pension means:- Total Pension which Employee is Entitled to Receive at the time of retirement. includes (commuted pension and uncommuted Pension).

NOTE:-

Family Pension Received by the legal Heirs after the Death of the Employee is Taxable in the Hands of the Legal Heir under the Head “Income from Other Sources” Because in this Case there is no Relationship of Employer and Employee.

LEAVE SALARY

Employees are Entitled to Various Type of Leave While in Service. The Leave May either be availed by them or in Case These are not Availed of,these may either lapse or these are allowed to be encashed every year or these are accumulated and encashed after Retirement or Death,but in most the cases the Employee is Entitled to accumulate his unavailed leave and encashment of such accumulated leave is done only at the time of Retirement/Resignation or Death.

ENCASHMENT OF LEAVE DURING TENURE OF SERVICE:-

It is Fully Taxable in the Hand of all Employees,Whether Government or Non Government. However relief can be taken under section 89.

EXEMPTION OF LEAVE ENCASHMENT AT THE TIME OF RETIREMENT UNDER SECTION 10(10AA)

Government Employees & Employees of Local Authority and Employees of Statutory Corporation

Any other Employees

FULLY EXEMPT

Minimum of the following Four limits:- 1.) Leave Encashment Actually Received 2.) 10 Months * Average Salary per Month 3.) 3,00,000 4.) Unavailed Leave as per Income Tax * Average Salary Per Month/Per Day Salary Means:-Basic Pay+Dearness Allowance(to the extentforming part of retirement benefits)+Commission(Fixed Percentage of Turnover) Average Salary Means:-Average  Salary of Last 10 Months Preceding the Date on Which Retirement occurs. Unavailed Leave:- Unavailed Leave is Calculated on the basis of Maximum 30 Days Leave for Every Year of Actual Service Rendered to the Employer from Whose Service he has Retired.This is Calculated in Below Manner. In Days:- 30 Days * Number of Years of service – Actual Availed Leave In Months:- 1 Month * Number if Years of Service – Actual Availed Leave

NOTES:-

Leave Salary Paid to legal Heirs of a deceased Employee in Respect of Privilege Leave Standing to the Credit of Such Employee at the time of His/Her Death is an Ex Gratia Payment on Compassionate Grounds in the Nature of Gifts.Thus the Payment is Not in the Nature of Salary.

Where an Assessee had Received Leave Salary in any Earlier Years and had Claimed Exemption Under Section 10(10AA) in Respect of the Leave Salary Received Earlier also, he will still be Entitled to this Exemption but the Limit Which at present is Rs. 3,00,000 shall be reduced by the Amount of exemption availed in earlier Year.

If Leave Salary is Received from More than one Employer in the Same Previous Year ,by an Employee the Limit of Rs. 3,00,000 Would Apply to the Aggregate of Gratuity Received from one or more Employers.

PROVIDENT FUND

Provident Fund Scheme is a Welfare Scheme for the benefit of Employees.Under this Scheme,certain Sum is deducted by the employer from Employee’s Salary as his Contribution to the  Provident Fund every Month.The Employer Also Contributes a Certain Percentage of the Salary of the Employee to Provident Fund.These Contributions are deposited/invested.The Interest Earned is also credited to provident fund Account of the Employees.

TAXABILITY OF PROVIDENT FUND:-

STATUTORY PROVIDENT FUND(SPF)	RECOGNISED PROVIDENT FUND(RPF)	UNRECOGNISED PROVIDENT FUND
Exempt	12% of Salary  OR Actual Contribution by Employer Whichever is Less is Exempt Salary means Basic Pay, Dearness Allowance (forming  part of Retirement Benefits), Commission(Fixed percentage of turnover)	Exempt
Not Taxable and Eligible for Deduction under section 80C	Not Taxable and Eligible for Deduction under  section 80C	Not Taxable
Exempt	9.5% of Accumulated Balance OR Actual Interest by Employer Whichever is Less is Exempt	Exempt
Exempt	Exempt	Employer Contribution  Fully Taxable Interest on Employer Contribution  Fully Taxable Employee Contribution Exempt Interest on Employee Contribution Taxable under “Other Sources Head”

(Republished with Amendments)