Salary contd1
Status of Nature of Leave Taxability
Employee Encashment
Government/ Non- Leave encashment It is chargeable to tax.
Government during Continuity of
employee employment
Government Leave encashment at It is fully exempt from
employee the time of retirement / tax under section
leaving job 10(10AA)(i)
Non-Government Leave encashment at It is fully or partially
employee the time of retirement / exempt from tax in
leaving job some cases under
section 10(10AA)(ii) )
In Simple words from the above tabloid summary we can conclude that
Leave Salary is chargeable to tax only in two cases first accumulated
leave being enchased by any class of employee- Govt. or Non Govt.
during the continuation of employment whereof it is fully chargeable to
tax.
Second being accumulated leaves enchased by a non govt. employee
on his/ her retirement whereof the complicated part of calculation of
exempted leave salary comes into picture which can be calculated as
LEAST of the following :
1. Period of earned leave (in no. of months) to the credit of the
employee at the time of his retirement leaving the job ×Average
monthly salary.
2. 10 × Average monthly salary.
3. The amount specified by the Government i.e.,
Rs. 3,00,000 /-;
4. Leave encashment actually received at the time of
retirement
• How to find out leave standing to the credit of an employee at the time
of retirement or leaving the job – THREE STEPS THEORY
• Step (a) – Find out duration of services in number of years (ignore any
fraction of year).
• Step (b) – Find out rate of earned leave entitlement from the service rules –
how many days leave is credited for each year of services rendered (earned
leave entitlement can not exceed 30 days for every year of actual services
rendered for the employer from whose services he has retired).
• For instance, if earned leave is credited at the rate of 45 days leave for each
year of service, for step (b) calculation shall be made at the rate of 30 days
leave for each year of service. If, however, earned leave is credited at the
rate of 23 days leave for each year of service, for step (b) calculation shall
be made at the rate of 23 days leave for each year of service.
• Step (c) – Find out earned leave actually taken or enchased (in number of
days) during the service time, the computation shall be made as follows:-
• Step (a) × Step (b) minus Step (c) ÷ 30
• How to find out Average monthly salary?
• Salary, for this purpose, means basic salary and includes dearness
Allowance if terms of employment so provide. It also includes commission
based upon fixed percentage of turnover achieved by an employee, (if any).
‘Average Salary’ for the aforesaid purpose is to be calculated on the basis
of average salary drawn during the period of 10 months ending on the date
of retirement.
BONUS
• It is taxable in the year of receipt if it has
not been taxed earlier on due basis. While
contractual(statutory) bonus is regarded
as salary i.e. fully taxable; gratuitous
bonus is taxable as perquisite. If bonus is
received in arrears, the assessee can
claim relief in terms of section 89.
GRATUITY
• In the present age, Gratuity is no more a gratuitous
payment but has become legally compulsory in most of
the cases. Gratuity being a retirement benefit is
generally payable at the time of employment and on
basis of duration of service. Where the payment of
Gratuity Act, 1972, is inapplicable, an employee can
claim gratuity under the terms of contract of employment
Whether Gratuity is taxable
Status of Employee
It is fully exempt from tax under
Government employee
section 10(10)(i)
Non-Government employee covered It is fully or partly exempt from tax
by the payment of Gratuity Act, 1972
under section 10(10)(ii)
Non-Government employee not It is fully or partly exempt from tax
covered by the payment of Gratuity
under section 10(10)(iii)
Act, 1972
In Simple words, the taxation part comes into picture only
in the last two cases, which are dealt below in detail:
IN THE CASE OF EMPLOYEES COVERED BY THE
PAYMENT OF GRATUITY ACT, 1972, [SEC. 10(10)(ii)]:-
Any gratuity received by an employee, covered by the
Payment of Gratuity Act, 1972, is exempt from tax on the
following basis
1. 15 days’ salary( 7 days’ salary in the case of
employee of a seasonal establishment) based
on salary last drawn for each of service (i.e.,
15 days’ salary × length of service)
2. Rs. 3,50,000
3. Gratuity actually received.
• How to find out length of service – If the period of
service is 6 months or less than 6 months, it shall be
ignored for this purpose. Conversely, if the period of the
service is more than 6 months it shall be taken as one
full year.
• Meaning of ‘Salary’ – “Salary” for the purpose of the
aforesaid limits means salary last drawn by the
employee and includes dearness allowance but does not
include any bonus, commission, house rent allowance,
overtime wages and any other allowance.
• Salary of 15 days – Salary of the 15 days is calculated
by dividing salary last drawn by 26, i.e. maximum
number of working days, in a month. For instance, if
monthly salary at the time of retirement is Rs. 1000, 15
days’ salary would come to Rs. 576.92/- (i.e., Rs. 1000 ×
15 ÷26).
IN THE CASE OF EMPLOYEES NOT COVERED BY THE
PAYMENT OF GRATUITY ACT, 1972,
• Any gratuity received by an employee, not
covered by the Payment of Gratuity Act, 1972, is
exempt from tax on the following basis
1. Rs. 3,50,000
2. Half month’s average salary for each
completed year of service
3. Gratuity actually received
• How to find out length of service –
Same as Above
• · Meaning of ‘Salary’ – Same as
Above
• Half Month’s Average Salary – Average
Salary being calculated on same lines as
in case of Leave Salary, such Average
monthly salary divided by 2 is Half month’s
Average Salary.