Mukesh Patel.in
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TAX FREE RETIREMENT BENEFITS!

Retirement Benefits that can be claimed as fully tax exempt:

  • Gratuity upto Rs.10,00,000
  • Leave Encashment upto Rs.3,00,000
  • VRS Compensation upto Rs.5,00,000
  • Entire PF Balance, without any ceiling

INCOME-TAX EXEMPTION FOR GRATUITY

Under the provisions of Section 10(10) of the Income-tax Act, gratuity received by an employee from his employer, on retirement, or becoming incapacitated before retirement, or expiring, or whose services are terminated, is exempt as under:

v      In case of Government employees or employees of a local authority, the whole of the gratuity amount received is exempt from tax.

v      Where the gratuity is received by an employee covered under the Payment of Gratuity Act, 1972, the exemption is limited to the extent of the least of the following:

  • 15 days salary based on the salary last drawn, for every completed year of service or part thereof (in excess of six months).
  • The amount of gratuity actually received.
  • Rs.10,00,000 (with effect from 18th May, 2010). The earlier limit prior to 18th May, 2010 was Rs.3,50,000.

v      In the case of any other employees the exemption would be worked out on the basis of the least of the following:

  • One-half month’s salary for each completed year of service.
  • Gratuity actually received.
  • Rs.10,00,000 (with effect from 24th May, 2010). The earlier limit prior to 24th May, 2010 was Rs.3,50,000.

If an employee, who has received gratuity in any earlier year from one employer, also receives gratuity from another employer in a later year, the aforesaid limit of Rs.10,00,000 (or Rs.3,50,000, if applicable) will be reduced by the amount of gratuity exempted from tax in any earlier year.

Section 89(1) of the Income-tax Act, which provides for relief when salary, etc. is paid in arrears or in advance, can come to valuably assist a salaried taxpayer in claiming further relief from income-tax on the amount which is in excess of the prescribed exemption limit of Rs.10,00,000 of Gratuity received by him. Such relief is computed under Section 89(1) read with Rule 21A(3).

EXEMPTION FOR LEAVE ENCASHMENT

It should be borne in mind that any leave encashment amount received by an employee during the term of his employment is taxable. However, leave encashment received at the time of retirement from service, on superannuation or otherwise, is exempt from tax under Section 10(10AA) of the Income-tax Act on the following basis:

v      In the case of Central or State Government employees, any amount received as leave encashment is fully exempt from tax.

v      In case of non-Government employees (including employees of local authority or statutory corporation), leave encashment is exempt from tax to the extent of the least of the following:

  • Cash equivalent of the leave salary in respect of the period of earned leave standing to the credit of the employee at the time of retirement/superannuation.
  • 10 months average salary.
  • Leave encashment amount actually received.
  • Amount specified by the Government. The amount specified in respect of persons retiring on or after 1st April 1998, is Rs.3,00,000.

As per the CBDT Circular dated 5-11-1965, salary paid to the legal heir of a deceased employee in respect of privilege leave standing to the credit of said employee at the time of death is not taxable as salary.

As held by the Madras High Court in ‘CIT vs. R.J. Shahney’ 159 ITR 160(Mad.) and the Bombay High Court in ‘CIT vs. D.P. Malhotra’ 229 ITR 394(Bom.), retirement from service includes not only retirement on superannuation, but also voluntary retirement by resignation from service.

PF PAYMENT EXEMPT FROM TAX

Sections 10(11) and 10(12) of the Income-tax Act grant Income-tax exemption in respect of payment made to an employee representing the credit balance of his account with any statutory Provident Fund or recognized Provident Fund.

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