Employee receives lump sum amount while retirement. It may be gratuity, commuted pension, leave salary, compensation for voluntary retirement, provident fund. In this article, I have tried to put some lights on the tax treatment of those elements.
Gratuity (Rule 10(10):
It is lump sum reward of the work by employer to employee. Tax treatment for gratuity is different for government employees and non government employees. Actually, in tax treatment of salary , many relaxations are given to government employees. May be it is one of the reasons why people are always preferred government job. But leaving that matter, let’s take a look on rule under section 10(10) income tax.
Any amount received as gratuity during the period of service is always taxable.
Category 1: For government employees:
Any death cum retirement gratuity received by government employees are exempt from tax.
Category 2: For employees covered under payment of gratuity act, 1072:
Exemption is available up to least of the following:
1. Rs. 10,00,000
2. Completed year of service (consider one year of service when service period exceeds 6 months)*last drawn salary*15/26
3. Gratuity actually received.
Note: salary for that purpose is salary plus DA.
Category 3: For employees other than category 1 and 2.
Exemption is available up to least of the following:
1. Rs. 10,00,000
2. Completed year of service (ignore fraction)*half months salary on the basis of last 10 months average immediately preceding the month in which any such event occurs.
3. Gratuity received.
Other points
1. If employee receives gratuity from more than two employees, he can get exemption up to above limit.
2. If employee receives gratuity in earlier year from previous year, exemption limit of Rs. 10,00,000 will be reduced by the amount exempt earlier.
Example for gratuity calculation:
Mr. Pranay has received gratuity worth Rs. 1,00,000 from his employer during financial year 2013-14. He had also received gratuity from other employer during financial year 2012-13 which was exempt for Rs. 2,00,000. Mr. Pranay retires on 31stJune, 2013 after completing 18 year of service. He has covered under payment of gratuity act, 1972. His salary for June was 6000 p.m.
Gratuity calculation:
Exempt up to least of following:
1. Rs. (10,00,000-2,00,000)=8,00,000
2. Rs. 6000*15/26*18=62307
3. 1,00,000
The exemption will be Rs. 37693 (1,00,000-62307).
Commuted pension-section 10(10A)
Uncommuted pension:
Uncommuted pension means monthly pension. When employee no matter government or non government receives monthly pension, it is always taxable.Some employees do not fill income tax return after retirement thinking that monthly pension is exempt, are committing mistake. If your pension amount exceeds basic exemption limit and TDS is not deducted, fill the tax and return both.
Commuted pension:
For government employees:
Commuted pension received by government employees are fully exempt from tax. J
For non-government employees:
ü If gratuity is received by employee, exemption is available up to 1/3rd of the amount of commuted pension, which he would have received had he commuted the whole of the pension. (if you do not understand, don’t worry. I have given example)
ü If gratuity is not received by employee, exemption is available up to half of the amount of commuted pension, which he would have received had he commuted the whole of the pension.
Example:
Mr. sadhu retires from TK ltd. on 30/6/2013. He receives 10000 as salary p.m. He is paid Rs. 2500 p.m. as pension. He got 220000 in lieu of 60% commuted pension on 31/12/2013. He does not receive gratuity.
Taxability of pension:
|
Particulars
|
Amount
|
|
|
Salary
|
1/4/13-30/6/13
|
30,000
|
|
pension
|
1/7/13-31/12/2013
1/1/14-31/3/2014
|
15,000 (2500*9)
3,000 (1000*3)
|
|
Commuted pension
Exemption
50%*220000/60*100
|
220000
(183333)
|
36,667
|
We will discuss taxation of other except of salary in next article…