retirement benefits



1.Gratuity – Section 10(10)

Gratuity is a payment made by the employer to an employee for the services rendered during the period of employment by the employee. It is usually paid at the time of retirement but it can be paid before provided certain conditions are met. It applies to enterprises having 10 or more employees on a single day in preceding 12 months. And once an organisation comes under the purview of the gratuity Act, then it will always remain covered even if the number of employees falls below 10.

Gratuity can either be received by:

  1. the employee himself at the time of his retirement; or
  2. The legal heir on the event of the death of the employee.

When are you Eligible?

You will be Eligible for gratuity if you have completed minimum 5 years of Service under your employer. It is not applicable to interns or temporary employees.

Calculation of amount of gratuity exempted from tax (on Retirement):

a) In case of Government Employee : Any gratuity received by a Government employee is wholly exempt from tax. This exemption is not available to employees of statutory corporation.

b) In case of Employees covered by Payment of Gratuity Act: An amount equal to the least of the following will be exempt from tax –

  • 15/26 x Salary last drawn x No. of completed years of service or part thereof in excess of 6 months.
  • 20,00,000 (hiked up from Rs. 10,00,000 as per the amendment)
  • Gratuity actually received

Example: Last drawn salary (Basic + Dearness Allowance) of MR X was Rs.1,00,000 per month. He is entitled to receive a gratuity of Rs.11,00,000. His tenure of employment was 19 years and 9 months.

Tax exemption on Gratuity – Lower of the below three:

Sr. No. Particulars Amount  
1 Gratuity computed 15/26*1,00,000*20 = 11,53,846
2 Exemption allowance (maximum) 20,00,000
3 Actual received 11,00,000
4Amount of exemption (least of the above ) 11,00,000
5 Taxable gratuity Nil

c) In Case of Employees not Covered under the Payment of Gratuity Act :An amount equal to the least of the following will be exempt from tax –

  • ½ x Average salary of last 10 months preceding the month of retirement x Completed year of service (fraction of a year is ignored)
  • 10,00,000
  • Gratuity actually received

Important Points:

  1. Gratuity received during the period of service by any category of employees i.e. government, covered or not covered under the act is fully taxable.
  2. Gratuity received at the time of death by the legal heir of any government employee is fully exempt u/s 10(10)(i)
  3. Gratuity received at the time of death by the legal heir of employees covered or not covered under gratuity act is taxable as per the limits mentioned, when gratuity was received on retirement.



Scope of Total income

Particulars Resident and ordinary resident Resident but not ordinary resident Non-Resident  
1.Income recieved or deemed to be received in India during the previous year Taxable Taxable Taxable  
2.Income accruing or arising or deemed  to accrue or arise in India. Taxable Taxable Taxable  
3.Income accruing or arising outside India:      
a) Business controlled in India or  profession set up in India. Taxable Taxable Not Taxable
b) Any other Income Taxabe Not Taxable Not Taxable

Income Deemed To Be Received In India – under Income Tax Act, 1961

  1. Income Received in India Any income which is received in India, during the previous year by any assessee, is liable to tax in India, irrespective of the residential status of the assessee and the place of accrual of such income. The receipt of income refers to the first occasion when the recipient gets the money under his own control.
  2. Income Deemed to be received in India – Section 7 : The following incomes shall be deemed to be received in India in the previous year even in the absence of actual receipt:
  • Contribution made by the employer to the recognized provident fund in excess of 12% of the salary of the employee
  • Contribution made by the employer to the recognized provident fund in excess of 12% of the salary of the employee
  • Interest credited to the RPF of the employee which is in excess of 9.5% p.a.
  • Transfer balance from the unrecognized fund to a Recognized Provident Fund
  • The contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a notified contributory pension scheme referred to in section 80CCD.

Income Deemed to accrue or arise in India – Section 9

The following income shall be deemed to accrue or arise in India:

Section Income
9(1)(i) (a)Any income through or from any business connection in India.
(b)Any income through or from any property in India.
(c)Any income through or from any asset or source of income in India; or
(d)Any income through transfer of a capital asset situated in India.
9(1)(ii) Any salary income, if it is earned in India
9(1)(iii) Any salary payable by the Government to an Indian citizen for service outside India
9(1)(iv) Dividend paid by an Indian company outside India
9(1)(v) Interest payable by Government, resident or non-resident.
9(1)(vi) Royalty payable by Government, resident or non-resident.
9(1)(vii) Fees for technical services payable by Government, resident or non-resident.

Income Tax – Basics

What is Income Tax?

Income tax is a direct tax payable by an assessee on the income earned during the previous year.

A direct tax is the one where the incidence & impact of taxation fall on the same entity.

Who is an Assessee?

An Assessee is any individual who is liable to pay taxes to the government against any kind of income earned or any losses incurred by him for a particular assessment year. Each and every person who has been taxed in the previous years for income earned by him is treated as an Assessee under the Income Tax Act, 1961.

An Assessee may be any individual liable to pay taxes for himself or to pay tax on behalf of somebody else.

Who is a Person?

Person includes:

  1. an Individual;
  2. a Hindu Undivided Family (HUF) ;
  3. a Company;
  4. a Firm
  5. an association of persons or a body of individuals, whether incorporated or not;
  6. a local authority; and
  7. Every artificial juridical person not falling within any of the preceding sub-clauses.
  8. Association of Persons or Body of Individuals or a Local authority or Artificial Juridical Persons shall be deemed to be a person whether or not, such persons are formed or established or incorporated with the object of deriving profits or gains or income.

What is Previous Year (PY)?

The Financial year in which the income is earned is referred to as the previous year.

In case of newly set up or a source of income newly coming to existence, then the previous year will be from the date of commencement of such set up or source of income till the end of financial year.

What is Assessment Year (AY)?

Assessment Year is the year following the financial year in which you have to evaluate the previous year’s income and pay taxes on it.

     Examples:

  • Income earned during PY 2018-2019 is chargeable to tax in the AY 2019-2020.
  • ABC Pvt. Ltd. is incorporated on 1-7-2018, the previous year for ABC Pvt. Ltd. will commence from 1-7-2018 and ends at 31-3-2019 and not from 1-4-2018. The AY is 2019-2020.

Exceptions to definition of Assessment year

As mentioned before, income earned in PY is assessed and taxed in AY. However, there are certain transactions or events, in respect of which such income earned in PY is taxed in that year itself, instead of taxability in AY.

Such exceptions are explained as below.

  • Income of non-resident from shipping business
  • No representative in India.
  • Income derived from carrying passengers, livestock or goods shipped at a port in India – 7.5% of the freight amount payable to owner of ship is deemed to be the Income accruing to the owner.
  • Income of persons leaving India.
  • Assessment of any association of persons, body of individuals or Artificial Juridical person formed or established only for a limited period
  • Any Person likely to transfer property to avoid tax
  • Discontinued Business.

Classification of heads of Income- Sec 14

The income earned by the assesse shall be classified under the following 5 heads of income for the purpose of computation of taxable amount subject to certain exemptions and deductions:

  1. Income from Salaries
  2. Income from House Property
  3. Profits & Gains from Business/Profession
  4. Capital Gains
  5. Income from Other Sources

Retirement Benefits

1. Gratuity Section 10(10)

Gratuity is a payment made by the employer to an employee for the services rendered during the period of employment by the employee. It is usually paid at the time of retirement but it can be paid before provided certain conditions are met. It applies to enterprises having 10 or more employees on a single day in preceding 12 months. And once an organisation comes under the purview of the gratuity Act, then it will always remain covered even if the number of employees falls below 10.

Gratuity can either be received by:

  1. the employee himself at the time of his retirement; or
  2. The legal heir on the event of the death of the employee.

When are you Eligible?

You will be Eligible for gratuity if you have completed minimum 5 years of Service under your employer. It is not applicable to interns or temporary employees.

Calculation of amount of gratuity exempted from tax (on Retirement):

a) In case of Government Employee : Any gratuity received by a Government employee is wholly exempt from tax. This exemption is not available to employees of statutory corporation.

b) In case of Employees covered by Payment of Gratuity Act: An amount equal to the least of the following will be exempt from tax –

  • 15/26 x Salary last drawn x No. of completed years of service or part thereof in excess of 6 months.
  • 20,00,000 (hiked up from Rs. 10,00,000 as per the amendment)
  • Gratuity actually received

Example: Last drawn salary (Basic + Dearness Allowance) of MR X was Rs.1,00,000 per month. He is entitled to receive a gratuity of Rs.11,00,000. His tenure of employment was 19 years and 9 months.

Tax exemption on Gratuity – Lower of the below three:

Sr. No. Particulars Amount  
1 Gratuity computed 15/26*1,00,000*20 = 11,53,846
2 Exemption allowance (maximum) 20,00,000
3 Actual received 11,00,000
4Amount of exemption (least of the above ) 11,00,000
5 Taxable gratuity Nil

c) In Case of Employees not Covered under the Payment of Gratuity Act :An amount equal to the least of the following will be exempt from tax –

  • ½ x Average salary of last 10 months preceding the month of retirement x Completed year of service (fraction of a year is ignored)
  • 10,00,000
  • Gratuity actually received

Important Points:

  1. Gratuity received during the period of service by any category of employees i.e. government, covered or not covered under the act is fully taxable.
  2. Gratuity received at the time of death by the legal heir of any government employee is fully exempt u/s 10(10)(i)
  3. Gratuity received at the time of death by the legal heir of employees covered or not covered under gratuity act is taxable as per the limits mentioned, when gratuity was received on retirement.

2. Pension [Section 10(10A)]

Pension can be divided into two types:

  1. Uncommuted Pension is received in regular instalments is taxable for all employees. I.e. both Government and non – Government employees.
  2. Commuted Pension is received in one time rather in instalments.

Taxability for commuted pension:

a) For Government employees: Commuted pension is exempt for the employees of Central & State Govt. or Local Authority or statutory corporation.

b) Any Other Employees: The amount of exemption will be as follows.

  • Employees who also receives gratuity: 1/3 of 100% Commuted value of pension.
  • Employees who does not receives gratuity: 1 /2 of 100% Commuted value of pension.

Notes:

  • Commuted value of pension = Pension received / Percentage of pension commuted
  • If pension is partly commuted and partly uncommuted then each portion’s exemption is calculated accordingly.

Pension Received by a Family member

  • Pension received by a family member is taxed under income from other sources in  Income Tax Return.
  • If this pension is commuted or is a lump sum payment it is not taxable.
  • Uncommuted pension received by a family member is exempt to a certain extent. i.e. Rs 15,000 or 1/3rd of the uncommuted pension received -whichever is less is exempt from tax.

For Example:  If a family member receives pension of Rs 1,00,000 the exemption available is least of – Rs 15,000 or Rs 33,333 (1/3rd of Rs 1,00,000).
Thus the taxable family pension will be Rs 100000 – Rs 15000 = Rs 85,000

3. Voluntary Retirement Scheme [Section 10(10C)]

What is Voluntary Retirement Scheme (VRS)?

VRS is an early Retirement option given by employer to its eligible employee by compensating them for taking an early retirement.

Certain conditions to be fulfilled to get exemption for VRS:

Rule 2BA of Income tax rules provides following requirement to claim exemption.

  • It applies to an employee who has completed 10 years of service or completed 40 years of age. (This condition doesn’t apply to employees of Public Sector Company).
  • It applies to all employees except directors of a company
  • The scheme of voluntary retirement [or voluntary separation] has been drawn to result in overall reduction in the existing strength of the employees
  • The retiring employee of a company shall not be employed in another company or concern belonging to the same management

It shall be exempted up to least of following:

  1. Statutory Limit 5,00,000.
  2. 3 months x salary last drawn x completed year of service
  3. Salary last drawn x balance of months left before the date of retirement or superannuation.
  4. Actual amount received.

*Salary for this purpose will include basic salary, dearness allowance (if it forms a part of retirement benefits) and Percentage wise fixed commission on Turnover.

Notes:

  • If the assesse has already taken relief under section 89, then exemption under this section is not available.
  • Deduction under section 10(10C) can be taken once only, therefore if deduction under this section is taken once then deduction is not available in any subsequent years.

4. Statutory Provident Fund [Section 10(11)]

Statutory Provident Fund (SPF) is governed by provident Funds act, 1925. It applies to employees of government, railways, semi-government institution, local bodies, universities and all recognized educational institution.

Tax Treatment :

  1. Employer’s Contribution – Employer’s contribution to such fund is not treated as income of the employee.
  2. Employees Contribution – Entitled to Deduction u/s 80C.
  3. Interest credited – Exempt from tax.
  4. Lumpsum received – Exempt from tax.

5. Recognized Provident Fund [Section 10(12)]

a) Recognized Provident Fund (RPF) is a scheme to which the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952 applies. It applies to enterprises employing 20 or more employees.

Tax Treatment :

  1. Employer’s Contribution – Excess of 12% of Salary is taxable as income of employee.
  2. Employees Contribution –  Entitled to Deduction u/s 80C
  3. Interest Credited – Excess of 9.5% interest is taxable as income of employee.
  4. Lump sum received – Exempt upon satisfying the conditions.

The Conditions for the purpose of exemption of lump sum payment of RPF are as follows:

  • If the employee has rendered a continuous service of 5 years or more. If the accumulated balance includes amount transferred from other recognized provident fund maintained by previous employer, then the period for which the employee rendered service to such previous employer shall also be included in computing the aforesaid period of 5 years.
  • If the service of employee is terminated before the period of 5 years, due to his ill health or discontinuation of business of the employer or other reason beyond his control.
  • If on retirement, the employee takes employment with any other employer and the balance due and payable to him is transferred to his individual account in any recognized fund maintained by such other employer, then the amount so transferred will not be charged to tax.

b) Un-Recognized Provident Fund (URPF) is a fund not recognized by the Commissioner of Income-tax

Tax Treatment :

  1. Employers Contribution: It is not treated as income of the employee.
  2. Employees contribution: No deduction under section 80C available
  3. Interest: It is not taxable.
  4. Lump sum received at termination: Payment on termination/retirement will include 4 things, viz., employee’s contribution and interest thereto and employer’s contribution and interest thereto, the tax treatment of such payment is as follows:
    • Employee’s contribution is not chargeable to tax; interest on employee contribution is taxed under the head “Income from other sources”.
    • Employer’s contribution and interest thereon are taxed as salary income.

c) Public Provident Fund: Public Provident Fund (PPF) was introduced in India in 1968 with the objective to mobilize small saving in the form of an investment, coupled with a return on it. Any Individual (whether Salaried or Self-Employed or any other category) can invest in this scheme.

Tax Treatment :

  1. Employers Contribution: Employer’s do not contribute to such fund.
  2. Interest: Interest credited to such fund is exempt.
  3. Employees Contribution –  Entitled to Deduction u/s 80C
  4. Lump sum received at the time of termination : Lump sum amount   received from such fund at the time of termination of services is exempt from tax.

6. Leave Encashment or Leave Salary [Section 10(10AA)]

What is Leave Salary?

Leave salary is a payment received by a employee as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise.

Computation of Leave Salary:

a) In Case Of Government Employee: Total amount received as leave encashment is exempt from tax

b) In Case Of Non-Government Employee: Total leave encashment received is the least of the following –

  1. 10 months average salary.
  2. Leave encashment actually received
  3. Amount equal to salary for the period of leave earned (based on last 10 months average salary)
    [Leave due = Leave allowed – Leave taken]
    [Leave Due(in days)/30days * Average salary p.m]
  4. Rs.3,00,000/-

Notes:

  • Leave Salary received during the period of service is fully taxable.
  • Average salary= Salary of 10 months immediately preceding the retirement or resignation.
  • Salary means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits and commission which is expressed as a fixed percentage of turnover, excludes all allowances and perquisites
  • Leave earned should not exceed 30 days for a year of actual service

Example: Mr Gupta retired on 1.12.2017 after 20 years 10 months of service, receiving leave salary of Rs 5,00,000. Other details of his salary income are:

  1. Basic Salary: Rs. 5,000 p.m.(Rs 1,000 was increased w.e.f. 1.4.2017)
  2. Dearness Allowance:  Rs. 3,000 p.m. (60% of which is for retirement benefits)
  3. Commission: Rs 500 p.m.
  4. Leave availed during service: 480 days
  5. He was entitled to 30 days leave every year.

Now, the exempted amount of Leave salary will be least of the following four figures:

Statutory Limit Rs 3,00,000
Leave encashment amount actually received Rs 5,00,000
10 months’ salary
({(5000*8 months) +(4000*2 months)+(60% of 3,000 *10 months)*10 months}/10 months)           
Rs 66,000
Amount equal to salary for the period of leave earned
[({20*30}- 480)/30*6600]
Rs 26,400

The least of the four is Rs 26,400; therefore, in this particular case Mr.Gupta is entitled for leave salary exemption of Rs. 26,400/-.

7. Retrenchment Compensation [Section 10(10B)]

What is Retrenchment Compensation?

The compensation received by a workman under the Industrial Disputes Act, 1947, or under any other Act or Rules, orders or notifications issued there under or under any standing orders or under any award, contract of service or otherwise, at the time of his retrenchment  is called Retrenchment compensation.

Computation of Leave Salary:

A deduction from retrenchment compensation is allowed under section 10(10B), which is least of the following: –

  • an amount calculated in accordance with the provisions of clause (b) of section 25F of the Industrial Disputes Act, 1947 (14 of 1947) ; or
  • such amount, not being less than fifty thousand rupees, as the Central Government may, by notification in the Official Gazette, specify in this behalf.

8. National Pension Scheme [Section 10(12A)]

What is National Pension Scheme?

National Pension Scheme is a voluntary and long-term investment plan for retirement under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and Central Government.

Tax Treatment:

9. Approved Superannuation Fund [Section 10(13)]

Approved superannuation fund means a superannuation fund or any part of a superannuation fund which has been and continues to be approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner

Exemption : Any payment from an approved superannuation fund is made—

  • on the death of a beneficiary; or
  • to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or
  • by way of refund of contributions on the death of a beneficiary ; or
  • by way of refund of contributions to an employee on his leaving the service in connection with which the fund is established otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement, to the extent to which such payment does not exceed the contributions made prior to the commencement of this Act and any interest thereon; or
  • by way of transfer to the account of the employee under a pension scheme referred to in section 80CCD and notified by the Central Government;

Tax Treatment:

  • Employee’s contribution to an approved superannuation fund is eligible for deduction under section 80C.
  • Interest received on the superannuation funds is exempt from tax.
  • Employer’s contribution to a superannuation fund upto Rs. 1 lakh is exempt from tax.( Any amount above Rs. 1 lakh will be subject to taxation).
  • If an employee wants to withdraw their superannuation fund at the time of resigning from a company, the entire amount will be subject to tax subject to certain exceptions.

Other Sources

Any income which is not chargeable to tax under any other heads of income and which is not to be excluded from the total income shall be chargeable to tax as residual income under the head “Income from Other Sources”.

Income chargeable to tax under the head “Income from other sources” shall include following:

  1. Dividend Income
  2. Income by way of winnings from lotteries, crossword puzzles, races including horse races, card games, gambling or betting of any form or nature whatsoever
  3. Interest on securities, if not taxable under the head ‘Profits and Gains of Business or Profession’
  4. Any sum received by an employer from his employees as contribution towards PF/ESI/ Superannuation Fund etc., if same is not deposited in the relevant fund and it is not taxable under the head ‘Profits and Gains from Business or Profession’.
  5. Income from machinery, plant or furniture belonging to taxpayer and let on hire, if income is not chargeable to tax under the head ‘Profits and Gains of Business or Profession’
  6. Composite rental income from letting of plant, machinery or furniture with buildings, where such letting is inseparable and such income is not taxable under the head ‘Profits and Gains of Business or Profession’
  7. Any sum received under Keyman Insurance Policy (including bonus), if not taxable under the head ‘Profits and Gains of Business or Profession’ or under the head ‘Salaries’
  8. Any sum of money or property received by an individual or HUF from any person shall be taxable under the head ‘Income from other sources’
  9. Interest received on compensation or enhanced compensation
  10. Family Pension
  11. Any compensation received by a person in connection with the termination of his employment or modification of terms and conditions relating thereto.
  12. Advance money received or money received in negotiation for transfer of a capital asset (only if the money is forfeited and it doesn’t result in the transfer of such asset).
  13. Any other income

Monetary gifts or property received by an individual or Hindu Undivided Family (HUF) which are chargeable to Tax.

The scheme of taxability of gifts are mentioned below;

  1. Sum of Money : If the following conditions are satisfied then any sum of money received (i.e, monetary gift may be received in cash, cheque, draft, etc.) by an individual/ HUF will be charged to tax:
    1. Sum of money received without consideration.
    2. The aggregate value of such sum of money received during the year exceeds Rs. 50,000.
  2. Movable Property :
    1. Without Consideration : The aggregate fair market value of the property, if it exceeds Rs 50,000
    2. Inadequate Consideration : The difference between the aggregate fair market value and the consideration, if such difference exceeds Rs 50,000
  3. Immovable Property :
    1. Without Consideration : The stamp value of the property, if it exceeds Rs 50,000
    2. Inadequate Consideration : The difference between the stamp duty value and the consideration, if such difference is more than the higher of Rs 50,000 and 5% of the consideration.

Monetary gifts or property received by an individual or Hindu Undivided Family (HUF) which are not chargeable to Tax.

In the following cases nothing will be charged to tax in respect of any sum of money or property received by an Individual or HUF without any consideration or inadequate consideration, if the same is received:​

  1. from any relative; or
  2. on the occasion of the marriage of the individual; or
  3. under a will/ by way of inheritance; or
  4. in contemplation of death of the payer or donor as the case may be; or
  5. from a local authority as defined under Explanation to clause (20) of section 10 of the Income-tax Act, 1961; or
  6. from any fund, foundation, university, other educational institution, hospital or other medical institution, any trust or institution referred to in section 10 or
  7. by any fund, trust, institution, any university, other educational institution, any hospital, other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10; or  (applicable if the property is received on or after 1st day of April, 2017)
  8. from or by any trust or institution registered under section 12A or section 12AA; or
  9. from an individual by a trust created or established solely for the benefit of relative of the individual. )
  10. any sum received by the way which is not regarded as transfer accordance with section 47 (i)/(iv)/(v)/(vi)/(vib)/(vid)/(vii)

Note:

  1. “relative” means,—
    • in case of an individual :
      1. spouse of the individual;
      2. brother or sister of the individual;
      3. brother or sister of the spouse of the individual;
      4. brother or sister of either of the parents of the individual;
      5. any lineal ascendant or descendant of the individual;
      6. any lineal ascendant or descendant of the spouse of the individual;
      7. spouse of the person referred to in items (2) to (6); and
    • in case of a Hindu undivided family, any member thereof;
  2. Property Means: A capital Asset of the assessee, namely –
    • Immovable property being land or building or both
    • Shares and securities
    • Jewellery
    • Archaeological collections
    • Drawings
    • Paintings
    • Sculptures
    • Any work of art or
    • Bullion.

*Any expenses allowed as deductions while computing Income from Other Sources?
*Any expenses not allowed as deductions while computing Income from Other Sources?