INCOME FROM SALARIES (RETIREMENT)

INCOME FROM SALARIES

(RETIREMENT)

When an employee retires from service or leaves a job and joins the other or he is retrenched, he receives some special payments from the employer, e.g. :

1. Gratuity [Sec.10(10)]
2. Pension and Commuted Value of pension [Sec. 10(10A)]
3. Earned leave salary [Sec. 10(10AA)]
4. Compensation on retrenchment [Sec. 10(10B)]
5. Compensation on voluntary retirement [Sec. 10(10C)]
6. Amount from provident fund [Sec. 10(11)(12)]  

GRATUITY :-    

For exemption of death-cum-retirement gratuity, employees have been classified into three categories :

(A) Government employee [Sec. 10(10)(i)]. Any death-cum retirement gratuity received by all categories of Government employees of a local authority is exempt from income tax in full. Even if after retirement he takes up an appointment in a private organisation the gratuity received by him from the government will be exempt from tax. 

(B) Non-Government employees covered by the Payment of Gratuity Act, 1972 [Sec. 10(10)(ii)].

• Employees covered by the Payment of Gratuity Act, 1972

The Payment of Gratuity Act applies to those employees who are working in any establishment,  factory,  mine, oilfield, plantation, port, railway or shop to do any skilled, semi-skilled, or unskilled, manual,supervisory, technical or clerical work, and whether or not such person is employed in a managerial or administrative capacity, but does not include : 

  (i) Employees of the Central or State Governments.

 (ii) Employees governed by any other Act or any other rules in this respect.

•  Exempted Amount.

Least of the following shall be exempt :

(i) 15 day's (7 days in the case of employee of a seasonal establishment) based on salary last drawn for every completed year of service and part thereof in excess of six months; or

(ii) Rs. 20,00,000 (w.e.f. 29.3.2018); or

(iii) Gratuity actually received.

 Meaning of Salary. It includes:

(i) Monthly basic salary last drawn;

(ii) Dearness allowance (whether as per terms of employement or not).

Computation of 15 day's salary. It is computed by the following formula :

Last Month Salary *15 

               26

(C) In the case of  Non-government employees not covered by the Payment of Gratuity Act, 1972 [Sec.10(10)(iii)].

Any gratuity received by him on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependents on his exempt up to the least of the following amounts :

(i) One-half month average salary for each year of completed service; or 

(ii) Rs. 20,00,000 (Notification No. 16/2019 Applicable w.e.f. 29-3-2018) or

(iii) Actual amount of gratuity received.

In order to compute the number of completed years of service, only the complete years will be taken into account and the service for a part of the year will be ignored. For example, if the total service of an employee is for 30 days 8 months and 20 days, only 30 years will be taken into account for the purpose and the remaining 8 months and 20 days will be ignored.

 Average Salary. It shall be computed on the basis of salary for ten months immediately preceding the month in which the event occurs.

 Meaning of Salary. It includes : 

(i) Basic Salary;

(ii) Dearness allowance, if is given as per terms of employment;

(iii) Commission based upon a fixed percentage of turnover achieved by the employee.

Example:-  
Basic = 15,000
Dearness allowance = 10,000
Commission = 5,000 
 Service year = 22
Gratuity received = 5,00,000

Salary = 15,000+10,000+5,000
           = 30,000

Covered :- 30,000 * 15/26
                      = 17,307.69
(a) 17,307.69 * service year
    =17,307.69 *22
   = 3,80,769
(b) Maximum limit = 20,00,000
(c) Gratuity received = 5,00,000
 Exempt (least of three) = 3,80,769

Taxable gratuity = Gratuity received - exempt
                           = 5,00,000 - 3,80,769
                           = 1,19,231

Not covered :- 30,000 * 15/30
                     = 15,000
(a) 15,000 * 22
   = 3,30,000
(b) Maximum limit = 20,00,000
(c) Gratuity received = 5,00,000
Exempt (least of three) = 3,00,000

Taxable gratuity = Gratuity received - exempt
                           =5,00,000 - 3,00,000
                          = 1,70,000

PENSION AND COMMUTED PENSION :-

• Pension

Whatever pension is received by an employee (Government or Non-government) after retirement, it is chargeable under the head 'Salaries'.
If person after serving in India, retires and settles in a foreign country, receives a pension on account of such service, such pension shall be deemed to accrue and arise in India and chargeable under the head salaries even he becomes non-resident in India.

• Commutation of Pension

Sometimes the employee wants to have a lump-sum payment in lieu of pension which he would have otherwise received monthly. The lump-sum payment which he receives on foregoing the pension (either full or a part of it) is known as the commuted value of the pension. This is exempt from tax subject to the following limits :[Sec. 10(10A)]

(i) Any payment received in commutation of pension by all categories of Central and State Government employees and employees of any local authority of of any statutory corporation, or any Government employee absorbed in a public sector undertaking, is fully exempt from tax. 

(ii) Any payment in commutation of pension received from any other employer is exempt, to the extent it does not exceed :
(a) the commuted value of one-third of the normal pension if he also receives gratuity;
(b) the commuted value of one-half of such pension if he does not receive gratuity.

(iii) Any payment received by an individual in commutation of pension from a fund set-up by Life Insurance Corporation of India since 1st August, 1996 or any other insurer under a pension scheme to which contribution is made by the individual receiving pension would be exempt from income tax.

EARNED LEAVE SALARY:-