Income 

under the head
Salary
RETIREMENT BENEFITS:
Pension
(exemption
u/s 10(10A))

Voluntary
Gratuity
Retirement
(exemption
(exemption
u/s 10(10))
u/s 10(10C))
RETIREMEN
T BENEFITS

Retrenchme
Leave
nt
Encashment
Compensati
on (exemption
u/s
(exemption
10(10AA))
u/s 10(10B))
 Gratuity
• Gratuity is a lump sum amount that employers pay their
employees as a sign of gratitude for the services provided.
• Sum received by an employee on his retirement is taxable
under head “Salary” and if received by legal heir of the
deceased employee then taxable under head “other sources”
• It is exempt under S. 10(10) and excess amount only shall be
added in salary.
• A person is eligible to receive gratuity only if he has completed
minimum five years of service with an organisation.
• As per the gratuity rules, an employee will be eligible to avail
gratuity upon –
• Retirement/Super annuation
• Resignation.
• Demise.
• Disablement due to an accident or a disease.
• VRS.
• Termination.
• Lay off due to retrenchment.
 Gratuity
• Taxable –
• (a) Govt Employees – NIL

• (b) Employees covered under the Payment of Gratuity Act 1972­ least of
the following will be exempted ­
• (i) 15/26 (×) Salary at the time of retirement (×) Completed years of service or
part thereof
• (In case of monthly rated employees for calculating 15 days salary, the no. of
days in month will be taken as 26 working days. Therefore monthly salary
shall be divided by 26 and multiplied by 15 to get 15 days salary. Eg. If
monthly salary is 2600 Rs. Then 2600/26 *15 = 1500 Rs. )
• [Salary = BS + DA (100%)] (does not include any bonus, commission, HRA,
overtime wages, and any other allowances.)
• (ii) Rs. 20,00,000 (before 2018 ­ 10,00,000)
• (iii) The amount of Gratuity actually received.
• (C) Employees not covered under the Payment of Gratuity Act
1972­ least of the following –
• (i) 1/2 (x) Average salary of last ten months (x) Completed years of
service
• (ii) Rs. 20,00,000
• (iii) The amount of Gratuity actually received.

• Salary = BS + DA (if the term of employment so provide) [excludes

all other allowances and perquisites]

• (D) Any gratuity paid to an employee while he continues to remain

in service not exempt in any case
 Pension (exempted u/s 10(10A))
• Pension is a payment made by the employer after the
retirement/death of the employee as a reward for past service.
• Pension is normally paid as a periodical payment on monthly
basis but certain employers may also allow an employee to
forgo a portion of the pension and receive a lump sum amount
by surrendering such portion of pension. This is known as
commutation of pension.
• The pension may be fully or partly commuted i.e. in lieu of the
pension, a lump sum payment is made to the employee.
 Pension (exempted u/s 10(10A))
• Uncommuted Pension: Fully taxable for all employees, whether Government or non­
Government.

• Commuted pension (getting pension in lump­sum amount):
(a) Government employee: The amount of commuted pension shall be fully exempted

(b) Non­Government employee receiving gratuity: 1/3rd of full value of pension shall be
exempt.
Full value: commuted pension divided by % age of commuted multiplied by 100
(c) Non­Government employee not receiving gratuity: 1/2 of full value of pension shall be
exempt
 Commuted pension

                                  Govt. employee                         Non­govt. employee

                                                   Fully exempt
                                                                                               non­govt.                               Non­govt.
employee
                                                                                employee receiving gratuity            not receiving
gratuity

                                                       1/3rd of full value of pension            ½ of the full
value of
                                                                                       shall be exempt.                    Pension shall be
exempt
 Mr. A retired on 10/4/2018 from KLM Pvt. Ltd. He was entitled to a pension of
Rs. 4000 p.m. At the time of retirement, he got 75% of the pension commuted
and received Rs. 1,20,000 as commuted pension. Compute the taxable portion
of the commuted pension if –
- He is entitled to gratuity = 1/3 rd of the full value
- Not entitled to gratuity = ½ of the full value

- Answer­ monthly – 4000 rs.
- Commuted Pension 75%  = 1,20,000
- 1,20,000/75 X 100 = 1,60,000 X 1/3 (1/2) = 53,333  (80,000)
- 1,20,000 – 53,333 (80,000)(Exempted) = 66,667 (40,000)(Taxable)
- Monthly = 4000 X 75/100 = 3,000
- Now, Monthly Pension = 4000 – 3000 = 1000  pm
 LEAVE ENCASHMENT
• While an employee is in service, he is allowed various types of
leaves like Medical Leave, Gazetted Holidays, Casual Leaves etc.
There are some types of leaves which can be carried forward to the
next year whereas there are some leaves which cannot be carried
forward to the next year.
• In case an employee does not avail all the leaves which were
allowed to him, he may also encash these leaves and earns salary
for the no. of the days which were allowed to be taken as leaves but
were not availed as leave.
• The policy of no. of leaves allowed to be taken and the leave
encashment depends on the employer for whom you are working,
and different employers have different policies for leave encashment.
 Taxation of Leave Encashment
• Leave encashment received during service ­ Any leave encashed during
service is fully taxable and forms part of ‘income from Salary’.
• Leave encashed at the time of retirement or resignation­
• (a) Government Employee [Sec. 10(10AA)(i)]­ fully exempt
• (b) Other Employees [Sec. 10(10AA)(ii)] ­ Exempt from tax to the extent of
least of the following:­
• Three lakh rupees
• Leave salary actually received
• 10 months salary (on the basis of average salary of last 10 months)
• Cash equivalent of unavailed leaves with the employee (based on last 10
months’ average salary) at the time of retirement or death. (considering
maximum 30 days leave per year)
• Leave encased received by legal heir – Fully exempt
• Salary for this purpose includes basic salary, dearness allowance and
commission based on fixed percentage of turnover secured by
employee.
• Question – E, an employee of XYZ pvt. Ltd. retired from the company
on 30.11.2019. At the time of his retirement, he received Rs. 2,88,000
as leave salary from his employer. The following information is provided
by the employee­
• Salary at the time of retirement – Rs. 18,000 p.m.
• Period of Service – 20yrs 8 months
• Leave encashment – Rs. 2,88,000
• Leave availed while in service – 14 months
• Balance unavailed leave at the time of retirement – 16 months
• Average salary of 10 months’ – Rs. 17,600 p.m.
• Leave entitlement – 1 ½ month of every completed year of service.
• Solution –
• (1) 3,00,000 Rs.
• (2) Rs. 2,88,000
• (3) 17,600 X 10 =1,76,000
• (4) Leaves= 20 X 30 = 600 days
• Leave availed = 14 X 30 = 420
• Leaves unavailed = 600 – 420 = 180
• Salary for unavailed leaves = 180 x [17,600/30 = 587] =
1,05,660
• Exemption = 1,05,660
• Balance = 2,88,000 – 1,05,000
 Retrenchment Compensation
• ‘Retrenchment’ means the termination of the service, by the
employer, of a workman for any reason other than punishment
imposed by way of disciplinary action. Termination of an
employee in such a manner is financially compensated by the
employer, and such financial compensation is termed as
‘retrenchment compensation’.
• Section 10(10B) of the Income Tax Act provides exemption
towards such retrenchment compensation received by the
workman.
• An amount of exemption available under section 10(10B) of the
Income Tax Act–
• Lower of the following amount is available as an exemption under
section 10(10B)–
• 1. The amount of retrenchment compensation received; or
• 2. The amount specified by the Central Government (i.e. INR 5
Lakhs); or
• 3. an amount equal to 15 days average pay for each completed year
of the service or part thereof in excess of 6 months. (section 25F(b)
of the Industrial Disputes Act, 1947) [15/26 X Average salary of last
3 months’ X completed years of service]
 Voluntary Retirement Compensation
[Sec. 10(10C)]
• voluntary retirement scheme is an option given by an
organization to its current employees to take early retirement
before the actual date of retirement.
• The amount of exemption is the actual amount of the
compensation received or Rs. 5,00,000, whichever is less.