Question 19.

[CAF 6 Past Paper, Spring 2020, Q5(b), 4 marks]

The benefit received by Sajid on his retirement would be treated as follows:

(i) Leave encashment comes under the definition of salary and therefore it would be fully taxable.

(ii) Since the amount was received from unapproved PF, the employer’s contribution and interest on accumulated
balance would be taxable in the year of receipt.

(iii) In the case of unapproved gratuity, exemption is available up to Rs. 75,000 or 50% of the amount receivable
whichever is lower. Therefore, the amount to be included in Sajid’s taxable income would be Rs. 2,425,000
(2,500,000‒75,000).

(iv) Since the market value of the vehicle was more than cost of acquisition the difference i.e. 1,500,000 would be
included in his taxable income.

Further, the amount of leave enchasment, provident fund and gratuity fund, were paid on termination of
employment, therefore, the same may be subject to tax at the average rate of preceeding 3 tax years.
Question 20. [CAF 6 Past Paper, Spring 2021, Q1(a), 7 marks]

Following options are available to Jamal (Salaried individual):

Option 1: By taxing salary in arrears at the tax rates of relevant tax years and remaining salary at current year tax
rates

Taxpayer: Mr. Jamal (Salaried Individual)

Resident Individual
Normal Tax Year 20X2

(A) SALARY
- Basic Salary (500,000 x 6) 3,000,000
- Leave encashment 600,000
- Salary in arrears (20W9) 1,300,000
- Salary in arrears (20X0) 1,700,000
Salary 6,600,000

Add. Exempt Income - Recognized Provident Fund 8,510,000

Total Income 15,110,000

Less. Exempt Income (8,510,000)

Taxable Income 6,600,000

TAX LIABILITY

(1) Tax on basic salary and leave encashment at current year tax rates
- Basic Salary (500,000 x 6) 3,000,000
- Leave encashment 600,000
3,600,000

Tax (As per slab rate) 405,000

(2) Tax on salary in arrears

NTY 20W9 NTY 20X0
Taxable Income (Given) 3,200,000 3,800,000
Salary in arrears 1,300,000 1,700,000
Taxable Income (Revised) 4,500,000 5,500,000

Tax Liability (Revised) - As per slab rate 630,000 880,000

Less. Tax already paid (Given) (404,500) (300,000)
Tax on salary in arrears 225,500 580,000 805,500

Tax liability 1,210,500

Option 2: By taxing the entire salary at current year tax rates

Taxpayer: Mr. Jamal (Salaried Individual)

Resident Individual
Normal Tax Year 20X2

(A) SALARY
- Basic Salary (500,000 x 6) 3,000,000
- Leave encashment 600,000
- Salary in arrears (20W9) 1,300,000
- Salary in arrears (20X0) 1,700,000
Salary 6,600,000

Add. Exempt Income - Recognized Provident Fund 8,510,000

Total Income 15,110,000

Less. Exempt Income (8,510,000)

Taxable Income 6,600,000

TAX LIABILITY
- As per slab rate 1,200,000

Conclusion: Jamal should select Option 2 as it would result in tax saving of Rs. 10,500 (1,210,500 – 1,200,000).