On retirement, an employee normally receives certain retirement benefits.
Such benefits are taxable under the head ‘Salaries’ as “profits in lieu
of Salaries” as provided in section 17(3). However, in respect of some
of them, exemption from taxation is granted u/s 10 of the Income Tax Act, either wholly or partly. These exemptions are described below:-
1. GRATUITY (Sec. 10(10)): (i) Any death cum retirement gratuity received by Central and State Govt. employees, Defense employees and employees in Local authority shall be exempt.
(ii)
Any gratuity received by persons covered under the Payment of Gratuity
Act, 1972 shall be exempt subject to following limits:-
(a) For every completed year of service or
part thereof, gratuity shall be exempt to the extent of fifteen days
Salary based on the rate of Salary last drawn by the concerned employee.
(iii) In case of any other employee, gratuity received shall be exempt subject to the following limits:-
(a) Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service
(b) Rs. 10 Lakhs whichever is less.
Where
the gratuity was received in any one or more earlier previous years
also and any exemption was allowed for the same, then the exemption to
be allowed during the year gets reduced to the extent of exemption
already allowed, the overall limit being Rs. 10 Lakhs.
As
per Central Board of Direct Tax’s letter F.No. 194/6/73-IT(A-1) dated
19.6.73, exemption in respect of gratuity is permissible even in cases
of termination of employment due to resignation. The taxable portions of
gratuity will quality for relief u/s 89(1).
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 2 1.8.90).
2. COMMUTATION OF PENSION (SECTION 10(10A)): In case of employees of Central & State Govt. Local Authority, Defense Services and Corporation established under Central or State Acts, the entire commuted value of pension is exempt.
3.
LEAVE ENCASHMENT (Section 10(10AA)): (i) Leave Encashment during
service is fully taxable in all cases, relief u/s 89(1) if applicable
may be claimed for the same.
(ii)
Any payment by way of leave encashment received by Central & State
Govt. employees at the time of retirement in respect of the period of
earned leave at credit is fully exempt.
(iii)
In case of other employees, the exemption is to be limited to the least
of following: (a) Cash equivalent of unutilized earned leave (earned
leave entitlement can not exceed 30 days for every year of actual
service) (b) 10 months average salary (c) Leave encashment actually
received. This is further subject to a limit of Rs.3,00,000 for
retirements after 02.04.1998.
(iv)
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
death is not taxable.
For
the purpose of Section 10(10AA), the term ‘Superannuation or otherwise’
covers resignation (CIT Vs. R.V. Shahney 159 ITR 1 60(Madras).
4.
COMPENSATION ON VOLUNTARY RETIREMENT OR ‘GOLDEN HANDSHAKE’(Sec.
10(10C)): (i) Payment received by an employee of the following at the
time of voluntary retirement, or termination of service is exempt to the
extent of Rs. 5 Lakh:
(ii)
The voluntary retirement Scheme under which the payment is being made
must be framed in accordance with the guidelines prescribed in Rule 2BA
of Income Tax Rules. In case of a company other than a public sector
company and a co-operative society, such scheme must be approved by the
Chief Commissioner/Director General of Income-tax. However, such
approval is not necessary from A.Y. 2001- 2002 onwards.
(iii)
Where exemption has been allowed under above section for any assessment
year, no exemption shall be allowed in relation to any other assessment
year. Further, where any relief u/s 89 for any assessment year in
respect of any amount received or receivable or voluntary retirement or
termination of service has been allowed, no exemption under this clause
shall be allowed for any assessment year.
5.
PAYMENT FROM PROVIDENT FUND (Sec. 10(11), Sec. 10(12)): Any payment
received from a Provident Fund, (i.e. to which the Provident Fund Act,
1925 applies) is exempt. Any payment from any other provident fund
notified by the Central Govt. is also exempt. The Public Provident
Fund(PPF) established under the PPF Scheme, 1968 has been notified for
this purpose. Besides the above, the accumulated balance due and
becoming payable to an employee participating in a Recognised Provident
Fund is also exempt to the extent provided in Rule 8 of Part A of the
Fourth Schedule of the Income Tax Act.
6.
PAYMENT FROM APPROVED SUPERANNUATION FUND (Sec.10(13)): Payment from an
Approved Superannuation Fund will be exempt provided the payment is
made in the circumstances specified in the section viz. death,
retirement and incapacitation.
7.
DEPOSIT SCHEME FOR RETIRED GOVT/PUBLIC SECTOR COMPANY EMPLOYEES:
Section 10(15) of the Income Tax Act incorporates a number ofinvestments,
the interest from which is totally exempt from taxation. These
investments may be considered as one of the options for investing
various benefits received on retirement. One among them, notified u/s
10(1 5)(iv)(i), is the DEPOSIT SCHEME FOR RETIRED GOVT/PUBLIC SECTOR
COMPANY EMPLOYEES which is a particularly attractive option for retiring
employees of Govt. and Public Sector Companies. W.e.f. assessment year
1990-91, the interest on deposits made under this scheme by an employee
of Central/State Govt. out of the various retirement benefits received
is exempt from Income-tax. This exemption was subsequently extended to
employees of Public Sector companies from assessment year 1991-92 vide
notification No. 2/19/89-NS-II dated 12.12.1990. Salient features of the
scheme are discussed below:
Rate of Return – Tax free interest @ 9% P.A. payable half yearly on 30th June and 31st December
Limit of Investment – Minimum Rs. 1000. Maximum not exceeding the total retirement benefits.
Liquidity – Entire balance can be withdrawn after expiry of 3 years from the date of
deposit. Premature encashment can be, made after one year from the date
of deposit in which case interest on amount withdrawn will be payable @
4% from the date of deposit to the date of withdrawal.
Other
considerations: Only 1 account can be opened in own name or jointly
with spouse. Account is to be opened within 3 months of receiving
retirement benefits. Scheme is operated through branches of SBI and its subsidiaries and selected branches of nationalised banks.
[This scheme has been discontinued w.e.f. 10.07.2004 vide notification F. No.15-01/2004-NS-2, dated 09.07.2004.]
Courtesy : spoitwa.blogspot.com
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