PROF.

VINIT KUMAR TAXATION 9873126173

4. SALARY
TREATMENT OF RETIREMENT BENEFITS

• Contribution made to Provident fund

• Gratuity – Section 10(10)
• Pension- Section 10(10A) & Section 17(1) made to Provident Fund
• Leave Salary- Section 10(10AA)

TAXABILITY OF CONTRIBUTION MADE TO PROVIDENT FUND

Statutory Provident Fund
Statutory Provident Fund is set up under the Provident Fund Act, 1952. It applies to employees of government, railways,
semi-government institutions, local bodies, universities and all recognised educational institutions.

Recognised Provident Fund

Recognised Provident Fund is set up under the Employee's Provident Funds and Miscellaneous Provisions Act, 1952.

Unrecognised Provident Fund

An Unrecognised Provident Fund is set up under a scheme, which has not been approved by the Income Tax Authorities.

Public Provident Fund (PPF)

PPF is set up under the Public Provident Fund Act, 1968. Any member of the public, whether in employment or not, may
contribute to PPF.
BASIS EMPLOYEE’S CONT. EMPLOYER’S CONT. INTEREST ACCUM. BALANCE
SPF

RPF

URPF

PPF

Withdrawals from RPF

• If any of the following conditions is satisfied, withdrawal from RPF shall be exempt in the hands of the employee:
➢ If the employee has rendered continuous service with his employer for a period of 5 years or more;
➢ If the services of the employee have been terminated before 5 years due to the following reasons:
❖ employee's ill health;
❖ the employer has contracted/discontinued his business; or
❖ any other reason beyond the control of the employee.

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➢ If after termination of his employment, the employee obtains a new employment and the total service with all
the employers is 5 years or more and the old employer should transfer the accumulated balance to any RPF
maintained by the new employer.
• If none of the above conditions are satisfied, then the amount shall be taxable in the following manner:
➢ Employer's Contribution & Interest thereon - Amount not taxed earlier (le 12% contribution & 9.5% interest)
shall be taxable in the hands of the employee u/h 'salary
➢ Employee's Contribution - Not taxable
➢ Interest on Employee's Contribution - Amount not taxed earlier (ie 9.5% interest) shall be taxable in the
hands of the employee u/h 'other sources'.
Further, at the time of payment, TDS shall be deducted @ 10% u/s 192A if the total payment during the relevant PY exceeds
Rs 50,000.

IMPORTANT POINT :-

1) SALARY :-

2) the amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer –
a) in RPF
b) in the scheme referred to in section 80CCD(1) and
c) in an approved superannuation fund.

QUESTION :-Mr. X has the following salary structure –

Basic pay ` 10,000 p.m. Commission (fixed) ` 2,000
DA ` 1,000 p.m. Entertainment allowance ` 2,000 p.m.

X contributes ` 20,000 to provident fund. Employer also makes a matching contribution. Compute gross salary of if –

QUESTION :- Mr. Sharma has been appointed as an accountant of ABC Ltd as on 1/4/2019, since then he is working
with the same company. The salary structure and increment details are as under:
Basic ` 5000 - 1000 - 8000 -1500 - 14000
D.A. ` 3000 – 500 – 5000 – 1000 - 10000
He and his employer contribute to URPF 14% of basic and DA. Every year 9% interest is credited to such fund. As on
1/4/202, the fund gets recognition. Hence, the accumulated balance in URPF was transferred to RPF. Comment on tax
treatment of such transferred balance.

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QUESTION :- Mr. X is appointed as a CFO of ABC ltd. In Delhi from 1-5-2020. His basic salary is ₹ 5,50,000 p.m. He is
paid 10% as DA. He contributes 11% of his salary and DA towards RPF and company contributes the same. Find
chargable perks in the hand of Mr. X for the PY 21-22.

TAXABILITY OF CONTRIBUTION MADE TO APPROVED SUPERANNUATION FUND

Like Provident Fund, Superannuation Fund is also a scheme of retirement benefits for the employees. These funds are
generally established for the purpose of providing annuities to the employees or their family members after the
retirement/death of the employees.
Particulars Tax Treatment
Employee's Contribution Allowed as deduction u/s 80C
Employer's Contribution Exempt

Interest from Fund Fully exempt from tax in the hands of the employee
Withdrawals from Fund Exempt in certain situations (like death, retirement, etc)

Mr. X has the following salary structure – Basic pay ` 10,000 p.m. Commission (fixed) ` 2,000 DA ` 1,000 p.m. Entertainment
allowance ` 2,000 p.m. X contributes ` 20,000 to provident fund. Employer also makes a matching contribution. Compute gross
salary of if – a) Mr. X is a Government employee and such provident fund is a statutory provident fund. b) Mr. X is an employee
of Y Ltd. and such fund is a recognized fund. c) Mr. X is an employee of Z Ltd. and such fund is an unrecognized fund.

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Section 10(10) TAXABILITY OF GRATUITY

General Meaning
• In its general sense, gratuity would mean a gratuitous payment made by the employer to the employee in appreciation
of the past services rendered by the employee and his association with the institution.
• With the enactment of the Payment of Gratuity Act, 1972, payment of gratuity has become a statutory obligation on
the part of the employer.
Taxability of Gratuity Received at the Time of Retirement
• Case 1 - In case of Government Employees:
Gratuity received by the employees of the Central Government, State Government or employees of a local authority is
fully exempt from tax.
• Case 2- In case of Non-Government Employees:
Employees Covered Under the Least of the following shall be exempt:
Payment of Gratuity Act, 1972 ➢ The amount of actual gratuity received;
➢ Rs 20,00,000;
➢ 15 days salary for each completed year of service or part thereof in excess of 6
months
Notes:
1) While calculating 15 days salary, total number of days in a month shall be taken
to be 26 days. In case of seasonal establishment, only 7 days salary shall be
calculated instead of 15 days.
2) Salary means the last drawn salary (Salary = Basic Pay + DA(Full)).
3) In case of piece rated employees, salary shall be computed on the basis of
average of the total wages received by such employees for a period of three
months immediately preceding the termination of their employment.
Employees NOT Covered Under Least of the following shall be exempt:
the Payment of Gratuity Act, ➢ The amount of actual gratuity received;
1972 ➢ Rs 20,00,000;
➢ Half month's average salary for each completed year of service
Note: Average salary, in this case, would mean the average of the retirement
benefit salary for 10 months immediately preceding the month of retirement.

Special Points
• No exemption from gratuity is allowed if the relationship of employer and employee does not exist. (Eg - gratuity paid
by LIC to its insurance agents is fully chargeable to tax)
• If gratuity is received by an employee during the continuity of his job, such gratuity shall be fully taxable in the hands
of all kinds of employees.
• Where an employee has passed away and the gratuity is received by the members of such deceased employee,
exemption shall be allowed in the normal manner and the balance amount shall be taxable in the hands of the family
members u/h 'other sources'.
• Reduction of Exemption: This provisions applies to an employee who has retired earlier and gratuity was paid to
him upon his retirement and some exemption was allowed to such employee u/s 10(10). If such employee retires
again after reassuming work, exemption can be claimed u/s 10(10) in respect of gratuity received again but the limit
of Rs 20 lakhs shall be reduced by the amount of exemption allowed earlier u/s 10(10).

QUESTION :- Ashok, an employee of ABC Ltd., receives ₹ 2,05,000 as gratuity under the Payment of Gratuity Act,
1972. He retires on 10th September, 2021 after rendering service for 35 years and 7 months. The last drawn salary
was ₹ 2,700 per month. Calculate the amount of gratuity chargeable to tax.

QUESTION :- Mr. Oldman retired from his job after 29 years 6 months and 15 days of service on 17/12/2021 and
received gratuity amounting ₹ 4,00,000. His salary at the time of retirement was basic ₹ 6,000 p.m., dearness
allowance ₹ 1,200 p.m., House rent allowance ₹ 2,000, Commission on turnover 1%, Commission on profit ₹ 5,000. He

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got an increment on 1/4/2021 of ₹ 1,000 p.m. in Basic. Turnover achieved by assessee ₹ 1,00,000 p.m. Calculate his
taxable gratuity if he is a —
a) Government employee
b) Non-Government employee, covered by the Payment of Gratuity Act;
c) Non-Government employee not covered by the Payment of Gratuity Act.

QUESTION :- Mrs. X is working with ABC Ltd. since last 30 years 9 months. Her salary structure is as under: Basic `
5,000 p.m. Dearness allowance `3,000 p.m. On 15/12/2021, she died. State the treatment of gratuity in following
cases:
Case 1: Mrs. X retired on 10/12/2021 & gratuity ` 4,00,000 received by her husband (legal heir) as on 18/12/2021.
Case 2: Husband of Mrs. X received gratuity on 18/12/2021 falling due after death of Mrs. X.

Mrs. X is covered by the Payment of Gratuity Act.

Section 10(10A) & Section 17(1)

TAXABILITY OF PENSION
General Meaning
• In its general sense, pension means a payment made by the employer after the death/ retirement of the employee as a
reward for past service.
• However, in certain cases, the employee may forgo a portion of his pension and request the employer to pay a
lumpsum amount in advance by surrendering such portion of the pension. This is known as commutation of pension.

Taxability of Uncommuted Pension -Section 17(1)

Uncommuted Pension (ie Periodical Pension): As per Section 17(1), uncommuted pension is taxable in the case of all
kind of employees.
Note: Where such pension is received by the family members of the employee after his death, such pension is known as
family pension and it is taxable in the hands of the family member u/h 'other sources' u/s 56. Annual deduction available
u/s 57 in respect of family pension is equal to 1/3' of such family pension or Rs 15,000, whichever is lower.

Taxability of Commuted Pension -Section 10(10A)

• Case 1 - In case of Government Employees:
Commuted pension received by the employees of the Central Government, State Government, local authority or
statutory corporation is fully exempt from tax
• Case 2- In case of Non-Government
If the Employee is Also in Receipt of Gratuity The commuted value of 1/3rd of pension is exempt from
Employees: tax. Any amount received over and above the exempted
pension is taxable.
If the Employee is NOT in Receipt of Gratuity The commuted value of 50% of pension is exempt from
tax. Any amount received over and above the exempted
pension is taxable.

Uncommuted Pension Exempt in Certain Cases

• section 10(18): Pension received by the winners of gallantry awards such as Param Vir Chakra, Maha Vir Chakra or
Vir Chakra shall be fully exempt from tax. Similarly, family pension received by the family members of such winners
after their death is also exempt from tax.
• Section 10(19): In case of death of members of the armed forces of India including para-military forces during the
performance of their operational duties, family pension received by the widow/children/nominee of such members
shall be exempt from tax.

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QUESTION :- Mr. Amit has retired from his job on 31/3/20. From 1/4/20 he was entitled to a pension of ` 3,000 p.m. On
1/8/20, 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)

Section 10(10AA) TAXABILITY OF LEAVE SALARY

General Meaning
• Employees are entitled to various types of leaves while they are in service. Some organizations allow an employee to
accumulate his leave and get the same encashed either during the continuity of service or at the time of
retirement/death of the employee.
• Any leave salary enchased by an employee during the continuity of his service is taxable in his hands irrespective of
the status of his employer.

Taxability of Leave Salary Received at the Time of Retirement

• Case 1 - In case of Government Employees:
Leave salary received by the employees of the Central Government and the State Government at the time of
retirement is fully exempt from tax.
• Case 2- In case of Non-Government Employees:
Least of the following shall be exempt:
➢ The amount of leave salary actually received;
➢ Rs 3,00,000;
➢ 10 times (x) average salary par month;
➢ Leave at the credit of the employee (x) average salary per month
Note 1: 'Salary', in this case, would mean retirement benefits salary. Further, average salary would be calculated on
the basis of salary drawn by the employee during the period of 10 months immediately preceding the date of his
retirement.
Note 2: Leave at the credit of the employee shall be calculated in the following manner:
Leave entitlement XXXX
(Leave entitlement cannot exceed 30 days leaves per completed year of service. Any part
of the year shall not be taken into consideration)
Less: Leave availed by the employee during the entire service (XXXX)
Less: Leave enchased by the employee during the entire service (XXXX)
Leave at the credit of the employee XXXX

Special Points
• If leave salary lia!: been received by an employee during the continuity of his job, such leave salary shall be fully
taxable in the hands of all kinds of employees.
• Where an employee has passed away and leave salary is received by the members of such deceased employee, such
leave salary shall be fully exempt in the hands of the family members.
• Reduction of Exemption: This provisions applies to an employee who has retired earlier and leave salary was paid to
him upon his retirement and some exemption was allowed to him u/s 10(10AA). If such employee retires again after
reassuming work, exemption can be claimed u/s 10(10AA) in respect of leave salary again but the limit of Rs 3,00,000
shall be reduced by the amount of exemption allowed earlier u/s 10(10AA).

QUESTION :- a) Mr. Bhanu is working in Zebra Ltd. since last 25 years 9 months. Company allows 2 months leave for every
completed year of service to its employees. During the job, he had availed 20 months leave. At the time of retirement
on 10/8/2018, he got ` 1,50,000 as leave encashment. As on that date, his basic salary was ` 5,000 p.m., D.A. was `
2,000 p.m., Commission was 5% on turnover + ` 2,000 p.m. (Fixed p.m.). Turnover effected by the assessee during last

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12 months (evenly) ` 5,00,000. Bhanu got an increment of ` 1,000 p.m. from 1/1/2018 in basic and ` 500 p.m. in D.A.
Compute his taxable leave encashment salary.
b) How shall your answer differ if the assessee had taken 2 months leave instead of 20 months, during his continuation of
job.

QUESTION :- Mr. Das retired on 31/3/2019. At the time of retirement, 18 months leave was lying to the credit of his account.
He received leave encashment equivalent to 18 months Basic salary ` 1,26,000. His employer allows him 1½ months leave for
every completed year of service. During his tenure, he availed of 12 months leave. At the time of retirement, he also gets D.A. `
3,000. His last increment of ` 1,000 in basic was on 1/4/2018. Find taxable leave encashment.

Section 80CCD PENSION UNDER NEW PENSION SCHEME

Eligible Person
Deduction is available only to an individual. Such individual can be:
➢ self-employed; or
➢ a salaried employee employed by the Central Government or any other employer.
Eligible Investment
Contribution towards the Notified Pension Scheme ('NPS') of the Central Government is eligible for deduction u/s 80CCD.
Till now, "Atal Pension Yojana" has been notified under this scheme. Where deduction is claimed u/s 80CCD in respect of
contribution to NP5, no deduction can be claimed under any other section.
Quantum of Deduction
➢ Case 1: Individual’s contribution- Section 80CCb(1):
Types of Employee Maximum Permissible Deduction
Salaried Employee 10% of Salary, subject to a maximum of Rs 1,50,000
Self -Employed Individual 20% of GTI, subject to a maximum of Rs 1,50,000
Note 1: As per Section 80CCE, the maximum amount of deduction available u/s 80C, 80CCC & 80CCD(1) cannot exceed Rs
1,50,000.
Note 2: "Salary" includes dearness allowance, if the terms of the employment so provide, but excludes all other allowances
and perquisites.
Note 3 - Section 80CCD(1 B):
In respect of amounts for which deduction could not be claimed u/s 80CC0(1), an additional deduction of maximum Ps
50,000 is available u/s 80CCD(1B). Following may be the reasons due to which deduction could not be claimed u/s
80CCD(1):
• The individual's contribution to NPS exceeds 10% of Salary/20% of GTI; or
• The individual's contribution to NPS exceeds Rs 1,50,000; or
• The total investments eligible for deduction u/s 80C, 80CCC & 80CCD(1) exceeds Rs 1,50,000.

Case 2 : Employer’s Contribution – section 80CCD(2):

• The amount contributed by the employer (Central Govt or any other employer) shall be first added to the salary of the
employee. Thereafter, a deduction shall be allowed u/s 80CCD(2) to the content of 10% of Salary.
• Section 80CCE does not apply in case of Section 80CCD(2). In other words, there is no limit on the amount of
deduction available u/s 80CCD(2) in respect of employer's contribution to NPS. However, such contribution should be
within the limit of 10% of Salary.

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