Mukesh Patel.in
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TAX FREE SAYONARA!

Receive a bouquet of tax benefits when you say good bye

to your employer on retirement or termination of service!

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:

GRATUITY EXEMPT UPTO RS.10LAKHS

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

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.

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 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 after1st 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 & SUPERANNUATION & FULLY EXEMPT

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 recognised Provident Fund.

Under Section 10(13), any payment out of an approved superannuation fund is treated as exempt if paid either at the time of death of the employee or upon his retirement after reaching a specified age or on the employee becoming incapacitated prior to such retirement.

RS.5 LAKHS EXEMPTION FOR VRS

‘Golden Handshake’, the popular connotation for ‘Voluntary Retirement Scheme’ (VRS), has been granted a special tax exemption. Section 10(10C) of the Income-tax Act provides for exemption upto a maximum amount of Rs.5,00,000 received at the time of voluntary retirement under the Voluntary Retirement Scheme (VRS) framed in accordance with the guidelines issued by the Central Government. This benefit can be availed of by the employees of any public or private sector companies, any statutory authority, local authority, cooperative society, University, IIT or IIM. The exemption is subject to rules and guidelines framed as per Rule 2BA of the Income-tax Rules.

EXEMPTION FOR COMMUTED PENSION

Under the provisions of Section 10(10A), any commuted pension received by any employee of the Government, local authority or statutory corporation is wholly exempt from tax. In respect of a non-Government employee, payment arising in commutation of pension received is exempt to the extent of the commuted value of one-third of the pension, in case he is entitled to receive gratuity and one-half of such pension in any other case. 

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