 PENSION [SEC.

17(1)(ii)]

 Pension means a periodical payment received by an employee after his retirement. On certain
occasions, employer allows to withdraw a lump sum amount as the present value of periodical
pension.

 When pension is received periodically by employee from ex-employer after retirement and until
such an employee dies, it is known as Uncommuted pension.

 On the other hand, pension received in lump sum is received by an emplyee from his employer
in lieu of periodical pension known as Commuted pension. Such lump sum amount is
determined considering factors like the age and health of the recipient, rate of interest, etc.

 Case A: Uncommuted pension

Uncommuted pension is fully taxable in the hands of all employees whether Government or Non
–Government employee.

 Case B: Commuted pension received by a Government employee

Commuted pension received by a Government employee is fully exempt from tax u/s 10(10A)(i).
 Note: Government employee here includes employee of the Central or State Government,
Local authority as well as employee of Statutory corporation. Judges of the High Court and the
Supreme Court are also entitled to the exemption [Circular No.623 dated 6/1/1992]

 Case C: Commuted pension received by an employee who also received gratuity [Sec.
10(10A)(ii)]

One third of total pension (which assessee is normally entitled for) commuted is exempt.

 Case D: Commuted pension received by an employee who does not receive gratuity [Sec.
10(10A)(ii)]

One half of total pension (which assessee is normally entitled for) commuted is exempt.

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QUESTION

 Mr.Amit has retired from his job on 31/3/2018.

From 1/4/2018, he was entitled to a pension of `
3,000 p.m. On 1/8/2018, he got 80% of his pension
commuted and received ` 1,20,000. Compute
taxable pension if he is:
Case a) Government employee;
Case b) Non-Government employee & not
receiving gratuity
Case c) Non-Government employee (receiving
gratuity, but not covered by the Payment of
Gratuity Act)

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 ANSWER 70

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 LEAVE SALARY ENCASHMENT

 As per service contract and discipline, normally, every employee is allowed certain period of
leave (with pay) every year. Such leave may be availed during the year or accumulated by the
employee.

 The accumulated leave lying to the credit of an employee may be availed subsequently or
encashed.

 When an employee receives an amount for waiving leave lying to his credit, such amount is
known as leave salary encashment.
 Case A: Leave salary received during continuation of service

Leave salary during continuation of service is fully taxable in the case of the Government
employee as well as other employees [Sec. 17(1)(va)].

 Case B: Leave salary received by Government employee on termination of service

At the time of termination of service, leave salary received by the Central or State Government
employee is fully exempted u/s 10(10AA)(i).

 Taxpoint: Government employee here does not include employee of local authority or public
sector undertaking or foreign Government employee.

 Case C: Leave salary received by non-Government employee on termination of service

 At the time of termination of service, leave salary received by a non-Government employee

(including employee of foreign Government, local authority, public sector undertaking) is
exempted to the minimum of the following u/s- 10(10AA)(ii):

a) Actual amount received as leave salary

b) ` 3,00,000/-
 c) 10 × Average salary p.m.

d) To the maximum of 30 days (normally taken as 1 month) average salary1 for every completed
year of service2, subject to deduction for actual leave availed during the tenure of service.

Academically: [{(1 × completed year of service) – leave actually taken in terms of month} ×
average salary p.m.]

 1. Average salary means Basic + DA# + Commission (as a fixed percentage on turnover) being
last 10 months average salary ending on the date of retirement or superannuation. (e.g. if an
employee retires on 18/11/2018 then 10 months average salary shall be a period starting from
19th Jan’ 2018 and ending on 18th Nov’ 2018).

 # If DA is not forming a part of retirement benefit then the same shall not be included in salary
for the above purpose. However, DA itself shall be fully taxable.

 2. While calculating completed year of service, ignore any fraction of the year. E.g. 10 years 9
months shall be taken as 10 years.

 RETRENCHMENT COMPENSATION
 Retrenchment means cancellation of contract of service by employer.
 Tax Treatment [Sec. 10(10B)]: Any compensation received by a worker at the time of
retrenchment is exempted to the extent of minimum of the following:
a) Actual amount received;
b) ` 5,00,000; or
c) An amount calculated in accordance with the provisions of sec. 25F(b) of Industrial Dispute
Act, 1947
 TAXABLE AMOUNT = ACTUAL AMOUNT – LEAST OF THE ABOVE

 VOLUNTARY RETIREMENT SCHEME Sec.10(10C)

 If an employee accepts retirement willingly in lieu of compensation then such retirement is
known as Voluntary Retirement.
 Employee who has completed 10 years of service or completed 40 years of age are given VRS.
 Amount of exemption
 Exemption shall be minimum of the following -
a) Actual amount received as per guidelines; or
b) ` 5,00,000.
c) Salary at the time of retirement multiplied by the balance month of service left.
d) the amount equivalent to 3 months salary for each completed year of service.
 Note: Salary here means [Basic + DA (if forms a part of retirement benefit) + fixed percentage
of commission on turnover], last drawn.
 PROFITS IN LIEU OF SALARY 17(3)
 Following receipts are taxable as profits in lieu of salary:
1. The amount of any compensation due to or received by an assessee from his employer or
former employer at or in connection with the (a) termination of his employment, (b)
modification of the terms and conditions of employment.
2.Any amount due to or received by the employee (in lump sum or otherwise) prior to
employment or after cessation of employment.

 DEDUCTIONS FROM GROSS SALARY [SEC. 16]

ENTERTAINMENT ALLOWANCE [SEC. 16 (ii)]
TAX ON EMPLOYMENT OR PROFESSIONAL TAX [SEC. 16(iii)]

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 ENTERTAINMENT ALLOWANCE [SEC. 16 (ii)]

 Entertainment allowance is initially included in taxable
allowances as fully taxable. Thereafter, a deduction is
allowed under this section from gross taxable salary.
However, deduction u/s 16(ii) shall be available to the
Government employee only.
 Deduction for Entertainment allowance being minimum of
the following:
a. Actual Entertainment Allowance
b. ` 5,000/-
c. 20% of Basic Salary.
Taxpoint:
■ Deduction allowed shall be irrespective of actual
expenditure incurred, whether for office or personal
purpose.
■ No deduction is available under this section to a Non-
government employee.
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TAX ON EMPLOYMENT OR PROFESSIONAL TAX

[SEC. 16(iii)]
 Tax on employment, profession, trade, etc. levied
by a State under Article 276 of the Constitution
will be allowed as deduction on cash basis,
whether paid by employee or by employer (on
behalf of employee) from gross taxable salary.
Note: If employer (on behalf of employee) pays
Professional tax then:
a. Firstly, it is to be included as taxable perquisite;
and
b. Further, it is allowed as deduction u/s 16(iii).

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