TAXIATION ASSIGNMENT – 1

Q1. What are the different type of Retirement Benefits?

Explain the tax treatment for following;
a) Gratuity
b) Pension
c) Encashment of Earned Leaves
d) National Pension Scheme
On retirement, an employee usually receives such retirement benefits
including Gratuity, Commutation of Pension, Leave Encashment,
National Pension Scheme or New Pension Scheme etc.
Under the head of 'Salaries' such advantages are taxable as 'profits
instead of salaries' as provided in section 17(3). However, in respect
of some of them, exemption from taxes is given either wholly or in
part under 10 of the Income Tax Act. Such exemptions are listed
below: —
GRATUITY (Sec. 10(10)):
(i)Any gratuity for death cum retirement earned by Central and State
Govt. Employees, security personnel and municipal government
employees are removed.
(ii) Any gratuity earned by individuals protected by the 1972 Payment
of Gratuity Act shall, subject to the following restrictions, be exempt:
Gratuity shall be excluded to the degree of fifteen days of salary for
each completed year of service or part thereof, on the basis of the rate
of salary last paid by the employee concerned.
(a) As estimated above, the sum of gratuity shall not exceed Rs 20
Lakh. (Limit increased to Rs. 20 Lakh effective 29.03.2018,
previous limit Rs. 10 Lakh.) S.O. notification. 1420 (E) from
29.03.2018

By Noman Areeb
BCom Hons Sem 5
 (iii) The gratuity earned shall be exempted in the case of every
other employee, subject to the following limits:
(a) The exemption is limited to half a month's salary (based on the
average of the last 10 months) for each year of service completed.
(b) Rs. 10 Lakhs, whichever is smaller.
If the gratuity was already earned in any one or more previous years
and any exemption was permitted for the same, then the exemption to
be permitted during the year is limited to the extent of the exemption
already permitted, Rs. 10 Lakhs being the total maximum.
As per the letter from the board, F. No. 194/6/73-IT (A-1) of 19.6.73,
gratuity exemption is permitted even in cases of termination of jobs
due to resignation. For relief u / s 89(1), the taxable portion of the
gratuity would be efficiency.
Income tax is excluded from the gratuity payout to a widow or other
legitimate heirs of any employee who dies in active service (Circular
No. 573 dated 21.8.90).

PENSION (SECTION 10(10A)):

(I) For staff members of the Central & State Govt. The entire
commuted value of the pension is excluded from the Local
Government, Security Services and Companies formed under
Central or State Acts.
(ii) In the case of every other employee, the commuted value of 1/3 of
the pension is excluded if the employee earns gratuity; otherwise, the
commuted value of 1/2 of the pension is excluded.
S.C. Judges. & H.C., uh. U / s of the commuted value up to 1/2 of the
pension shall be entitled to exemption. (Circular No. 623 dated
6.1.1992).

ENCASHMENT OF EARNED LEAVES (Section 10(10AA)):

By Noman Areeb
BCom Hons Sem 5
I Leave Encashment is entirely taxable in all instances during service,
relief u / s 89(1) can be demanded for the same if applicable.
(ii) Any payment earned by the Central & State Govt. by way of leave
encashment. Employees are entirely excluded at the time of retirement
in respect of the duration of accumulated credit leave.
(iii) In the case of other workers, the exception shall be limited to at
least the following: (a) Cash equivalent of unused earned leave
(entitlement to earned leave does not exceed 30 days per year of
actual service) (b) Annual salary of 10 months (c) Entitlement to
leave actually taken. This is also subject to the Rs.3,00,000 cap for
pensions after 02.04.1998.
(iv) The wage allowance paid to the legitimate heirs of a deceased
employee in respect of a privilege leave on the credit of that employee
at the time of death shall not be taxable.

National Pension System (NPS) - For new government employer

entrants, NPS is valid. It is mandatory for individuals joining the
Government service on or after January, as per the scheme,
Service or any other, to contribute 10% of the monthly salary to NPS,
1, 2004. The employer is expected to make a corresponding
contribution to the said account. The tax treatment under NPS is as
follows: the employer's contribution to NPS is first found in the
employee's hands under the heading 'Salaries' 1.2.
This contribution is deductible to the maximum of 10% of the
employee's compensation pursuant to section 80CCDD.

However, in the case of a central government employee, this

deduction has been increased to 14 percent of the salary, with effect
from the 2020-21 assessment year.

By Noman Areeb
BCom Hons Sem 5
Under section 8CCD (1), the employee's contribution to NPS (to the
sum of 10 per cent of the employee's salary) is also deductible.
If a pension is paid out of the sum referred to above, it would be
taxable in the beneficiaries' hands.

'Salary' provides a dearness allowance for the purposes of pages 1 and

2 (supra) if the terms of employment include but exempt all other
allowances and perquisites. It also provides a fee if the compensation
is due at a fixed percentage of the turnover of the employee.
The cumulative sum of the deduction provided for in sections 80C, 8
OCCC and 80CCĐ (1) [e.g. Employee (or any other individual)
contributions to NPS may not exceed Rs 150,000. 7. In addition, from
the year 2016-17 of the evaluation. An additional amount (up to Rs
50,000) may be contributed to NPS by the employee (or any other
person who has joined NPS) and demand the same deduction under
section BOCCE (1B). The CCD (1B) contribution is not protected by
the cumulative ceiling referred to in point 6. (infra)

Q2. What are different types of Provident Fund? Explain

in detail. Also explain its tax treatment.
Long-term saving is quite a task, but it must take place for potential
benefits and emergencies to be strengthened. The Provident Fund
(PF) is a post-retirement insurance scheme that allows individuals to
invest a portion of their income on a regular basis, combining to
provide ample funds for good and safe living following individuals'
retirement.
The Job Provident Fund Organization (EPFO) offers this scheme. All
the companies having more than 20 members are eligible to apply for
the EPF scheme.

By Noman Areeb
BCom Hons Sem 5
Types of Provident Funds and Implication of Taxes:
There are four types of Provident Funds, depending on the different
tax circumstances and their effects, which include:
 Statutory Provident Fund
 Recognized Provident Fund
 Unrecognized Provident Fund
 Public Provident Fund

Statutory Provident Fund (SPF):

 These Provident Funds are managed by local authorities, public
bodies, railways, universities, etc ..
 The Provident Funds Act, 1925 comes under this action.
 The employer does not have to pay taxes on their contributions,
while the contributions of the workers are taxable under section
80c.
 • There are no tax consequences for the interest offered as it is
not treated as part of the profits.
 When redeeming the entire sum after retirement, one does not
need to pay tax.
 If the person deactivates their PF account, no additional tax
consequences are required, not even during the process for
withdrawing the number.

Recognized Provident Fund (RPF):

 The most famous PF is the Known Provident Fund. RPF applies
to all workers employed in businesses with more than 20 staff.
 The employee may either establish a scheme for their
contributions under the PF trust or can adopt the PF
commissioner's scheme, but all the schemes must be authorised
by the CIT (Commissioner of Income Tax).

By Noman Areeb
BCom Hons Sem 5
  If the contribution of the workers is above 12 percent, then it is
taxable for the year in which the contribution is made.
 The tax is withheld based on Section 80C for the contribution
share of the workers.
 During the redemption, the cumulative sum is not taxable only
if the employee has given 5 years of continuous service.
Unrecognized Provident Fund (UPF)
 These funds are not accepted by the CTI (Commissioner of
Income Tax).
 The payments received in a single financial year are not taxable
to the employer under these provident funds.
 For the employee, the tax deductions are also not made, i.e.
Section 80C is not implied.
 One does not have to pay interest tax.
 This number is taxable under the name of 'Salary Benefit' at the
time of withdrawal. However, under this clause, the donation
made by the employee is not taxable and, instead, other taxes
are inferred.

Public Provident Fund (PPF)

 This Collective Provident Fund scheme is widely open to all,
whether working or unemployed.
 The minimum donation sum must be Rs. 500 and up to Rs. 1.5
lacs is the maximum amount.
 After a term of 15 years, the repayment of this amount
contributed takes place.
 This serves as one of the most valuable potential savings and
investment plans.
 The interest gained on the amount charged is also tax-free.
Q3. What do you mean by deemed ownership under
section 27? Explain.

By Noman Areeb
BCom Hons Sem 5
In the following situations, even though they are not the legitimate
owners of the land, the individual is considered to be the owner of the
property:-
(1) An person who, without sufficient consideration, has transferred
his or her property to his or her spouse (other than in connection
with an arrangement to live apart) shall consider his or her
minor child (not being a married daughter) to be the owner of
that property.
If a person transfers another asset and purchases house property from
that asset from his spouse or minor child, then that person is not
considered as a deemed owner. Example: If Mr. X gives Rs. 5,00,000
to his wife and his wife from that Rs. 5,00,000 to buy a house
property, then Mr. X is not considered as the deemed owner and his
wife's income from such property is taxable.
2) If property is assigned to its shareholders / members by the
company / cooperative society, therefore the owner can legally be the
company / cooperative society. But the shareholder / member to
whom the property is allocated is considered to be the property
owner.
3) Unless the buyer has taken possession of the property without
filing the selling deed, the owner of the property is considered.
A individual who, in part executing a contract of the nature referred to
in section 53A of the Transfer of Property Act, 1882, is permitted to
take over or maintain possession of any building (or part thereof) is
also considered to be the owner of that building (or part thereof).
4) A individual who, by virtue of any transaction referred to in section
269UA(f), acquires any rights (excluding any rights in the form of a
lease from month to month or for a term not exceeding one year) in or
in respect of any building (or part thereof). Example:-If an individual
leases a house for a duration of 12 months or more, Persons who
purchase Power of Attorney-based property]

By Noman Areeb
BCom Hons Sem 5
Q4. Discuss the tax treatment for House Rent Allowance.
House Rent Allowance (HRA) for most workers is a part of their pay
structure. While it is a part of your salary, the HRA is not entirely
taxable, unlike the basic salary. Under Section 10 (13A) of the
Income-Tax Act, 1961, a portion of the HRA is excluded, subject to
certain conditions.
Before meeting taxable income, the duration of the HRA exemption is
deductible from overall income. It allows an employee to save cash.
But bear in mind that if an employee stays in his own home or if he
does not pay any rent, the HRA collected from your employer is
completely taxable.
This tax benefit is only applicable to salaried individuals who are
living in rented accommodation and have the HRA portion as part of
their salary structure. The deduction should not be used by self-
employed professionals.
The exemption for HRA benefit is the minimum of:
i) Actual HRA received
ii) 50% of salary if living in metro cities, or 40% for non-
metro cities; and
iii) Excess of rent paid annually over 10% of annual salary
If 'Dearness Allowance (DA)' (if it forms part of retirement benefits)
and 'Commission earned on the basis of sales turnover' are valid, the
minimum HRA exemption available will also be applied to the
calculation.
Only for the time in which the rented house is occupied is the tax
benefit available to the individual.
Only upon submission of rental receipts or a rental agreement with the
house owner can HRA exemptions be made available.

By Noman Areeb
BCom Hons Sem 5
If the rent paid is more than Rs 1,00,000 annually, it is compulsory
for the employee to report the 'landlord' Pan Card to the employer.
In claiming the HRA tax gain, there may be unique situations, such
as:
1. Paying rent to members of the family
2. He owns a home, but he lives in a different place.
While claiming a tax deduction, one must note that any
accommodation must not be owned by the person himself or his / her
spouse, or minor child, or as a member of the Hindu Undivided
Family (HUF). Also, if the person owns any residential property at
any location and receives rent from it, no deduction is permitted.
If your own home is rented out or you work in another place, you can
take advantage of the simultaneous value of the deduction available
for the home loan against 'interest charged' and 'principal repayment'
and HRA. The same is not, however, applicable in the case of Section
80GG.

By Noman Areeb
BCom Hons Sem 5