PROFIT IN LIEU OF SALARY [17(3)]. Following are the types of receipts treated as profits in lieu of salary 1. The amount of any compensation due to or.

PROFIT IN LIEU OF SALARY [17(3)]

Following are the types of receipts treated as profits in lieu of salary1. The amount of any compensation due to or

received by an employee from his employer or former employer at or in connection with the termination of his employment

2. Any amount of any compensation due to or received by an employee from his employer or former employer at or in connection with the modification of the terms and conditions of contract of employment

3) Any amount of payment due to or received received by an employee from his employer or former employer except the following types of payment to the extent these payments are except u/s 10

i. Amount of payment received as gratuity exempted u/s 10 (10)ii. Amount of payment received as commuted pension exempted u/s

10(10a)iii. Amount of payment received as retirement compensation exempted

u/s 10(10b)iv. Amount of payment of house rent allowance received and

exempted u/s 10(13a)v. Amount of payment received from an approved superannuation

fund u/s 10(13)vi. Amount of payment received from a recognized provided fund to

the extent it is exempt u/s 10(12)vii. Amount of payment received from statutory provident fund or Public

Provident Fund Section u/s 10(11)

4) Any amount of payment received by employee from unrecognized provident fund or any such other fund to the extent to which it does not consist of employee’s own contribution and interest thereon

5) Any amount of sum receive under a Keyman insurance policy including the sin allocated by way of bonus on such policy

6) Any amount due or received whether in lump sum or otherwise by any employee from any person

a) Before his joining any employment with that person; or

b) After cessation of his/her employment with that person

Payments Exempted U/s 101. Leave Travel Concession/Assistance

[section 10(5)] Through this provision employees are

encouraged to travel in India along with their families and to help the employees the travel expenses are given by employer which are exempt u/s 10(5)

1) If journey is performed by air: Least of the following two amounts will be exempted:

i) Economy class air fare of the national carrier by the shortest route.

ii) actual amount spent by the employee on journey by air travel.

2. If journey is performed by rail: Least of the following two amounts will be exempted:

i) Air conditioned first class rail fare by the shortest route.

ii) actual amount spent by the employee on journey by rail.

3) If place of origin of journey and place of destination is connected by rail:

Least of the following two amounts will be exempted:

i) Air conditioned first class rail fare by the shortest route.

ii) actual amount spent by the employee on journey by rail.

4) If place of origin of journey and place of destination is not connected by rail

a) if a recognized public transport system is operating. Least of the following two amounts will be exempted:

i) First class or deluxe class fare by the shortest route.

ii) Actual amount spent by the employee on that journey

b) if a recognized public transport system does not exist. Least of the following two amounts will be exempted:

i) Air conditioned first class rail fare by the shortest route.

ii) Actual amount spent by the employee on that journey.

OTHER POINTS

a) Block of 4 years:

a block will consist of 4 calendar year

b) Carry over clause

c) Rail/Air/Bus fare only

d) Exemption only regarding actual expenditure

e) Family

f) Not more than 2 children

2)Perquisites and allowances paid by government to its employees posted outside India [section 10(7)] Any perquisite or allowance given by

Government to its employees who are working outside India is fully exempt from tax.

As such Motor car provided to employee working outside India or house rent allowance or any other benefit is fully exempted from tax.

3) Death –cum-retirement gratuity [Section 10(10)] Gratuity refers to a lump sum payment made

by an employee at the time of leaving job in appreciation of his long and loyal services.

Occasions to receive gratuity

I) At the time of leaving job II) In the event of Death of employee

I) In this case gratuity is received by employee on leaving job either due to voluntary retirement or due to statutory retirement on reaching the super annuation age. Gratuity so received by the employee is taxable under the head salary after claiming exemption as provided under section 10(10)

II) Gratuity can also be received by the legal heirs of an ex-employee in the event of death of such employee. In this case gratuity received shall be taxable in the hands of legal heirs under the head “Income from other Sources”. In this case also, an exemption will be granted as provided under section 10(10)

Exemption of gratuity

a) Government Employee[exemption U/S 10(10)(i)

b) Non-Government Employee[exemption U/S 10(10)(ii)&(iii)

B(I) Employee covered under POGA, 1972

[Sec. 10(10)(ii)]

B(II) Employee not covered under POGA, 1972

[Sec. 10(10)(iii)]

Exemption uptoleast of 3 months

Exemption uptoleast of 3 months

Fully Exempt

EXAMPLE SHOWING HOW TO FIND TAXABLE GRATUITY, IF A PERSON IS NOT COVERED UNDER GRATUITY ACT,1974

Example of computing gratuity Mr. Girish kanad retired on 15-6-2013 from a

manufacturing company after putting service of 30 years and 7 months. He received a Gratuity of Rs.3,60,000. Basic salary of Mr. Kanad was Rs. 20,000 p.m during 2012 and Rs. 22000 p.m during 2013. He was also getting D.A.@ Rs. 5,000 p.m. which was increased from Rs. 4000 on 1-4-13.50% of D.A. is presumed to enter into salary for computation of all retirement benefits but 100% of D.A. is part of basic salary for calculation of pension benefits . Compute his taxable Gratuity. If he is not covered under payment of Gratuity Act,1972

Computation of taxable Gratuity

Basic salary:

August 2012 to Dec. 2012 20,000 * 5 =1,00,000

January 2013 to May 2013 22,000 * 5 = 1,10,000

D.A.

August 2011 to March 2013 4,000 * 8 = 32,000

April 2012 to May 2013 5,000 * 2 = 10,000

= 42,000

50% enters into salary = 21,000

2,31,000

Average monthly salary = 2,31,000/10 = 23,100

Exemption shall be least of the following 3 amounts:

i) Statutory Amount Rs.1,00,000

ii) Actual Amount Received Rs. 3,60,000

iii) ½ month’s salary for each year of completed service 23,100/2 * 30= 3,46,500

# Taxable Gratuity= Rs. 3,60,000 – Rs. 3,46,500 =RS. 13500

Example showing computation of taxable gratuity

Example showing how to find out taxability of pension in different cases

Example Showing How To Find out taxable amount of commuted value of pension if (a) if he gets gratuity (b) if he does not get gratuity

Mr. Rajender Singh retired on 31-12-2013 and his pension was fixed at Rs. 3600 p.m. He got ¾ of the pension commuted for which he received Rs. 1,80,000 from his employer, a Ltd. Co. Find out taxable amount of commuted value of pension if (a) if he gets gratuity (b) if he does not get gratuity

SOLUTION:

IF HE GETS GRATUITY. exempted YPTO COMMUTED VALUE OF 1/3 OF PENSION

For ¾ of pension commuted value is =1,80,000

For full of pension commuted value is = 1,80,000 * 4/3

For 1/3 of pension commuted value is =1,80,000*4/3*1/3

Exempted =80,000

Taxable=RS 1,80,000-80,000=Rs1,00,000

IF HE DOES NOT GET GRATUITY: TAX FREE UPTO COMMUTED VALUE OF 1/2 OF PENSION

For ¾ of pension commuted value is =1,80,000For full of pension commuted value is = 1,80,000 * 4/3For 1/2 of pension commuted value is =1,80,000*4/3*1/3Exempted =80,000Taxable=RS 1,80,000-1,20,000=Rs 60,000

4) Leave encashment [Section 10(10AA)]

As per the terms of the employment generally an employee is granted certain period of leave(s) on yearly bases. Such leave(s) may be casual leaves, medical leaves and privileged leaves or earned leaves.

Generally an employee can accumulate his medical leaves and priviledged leaves and can avail such leaves in subsequent years as per necessity.

However in some cases an employee can encash his accumulated priviledged/earned leaves and can get salary for the same.

Such receipt of salary by an employee from his employer in lieu of his accumulated leaves is called “Leave Encashment”

TAX TREATMENT OF LEAVE ENCASHMENT

(A) Leave Encashment during service

(B) Leave Encashment on leaving job/on Retirement

(c) Leave Encashment After death

Fully taxable

Fully ExemptExemption upto least of 4 limits

Fully Exempt

B(I) Government Employee

B(II) Non-Government Employee

EXAMPLE SHOWING HOW TO COMPUTE TAXABLE AMOUNT OF LEAVE ENCASHMENT

Mr. X retires on 1st July after 18 years of service and receives Rs. 75,000 as amount of leave encashment for 15 months. His employer allows 45 day leave for every one year of service. During service ha has already encashed leave for 12 months. Calculate the taxable amount of leave encashment if his salary during 1-7-2012 to1-7-2013 was Rs. 5,000 p.m.

Solution:

Calculation of the taxable amount of leave encashment of Mr. X

Leave due as per section 10 (10AA) @ one month leave for every

One year service =18 months

Less: leave already availed =12 month

Leave due at the time of retirement = 6 month

Least of below is exempted

Limits: i) Notified Limit Rs. 3,00,000

ii) 10 months average salary(10 * 5,000) Rs. 50,000

iii) Cash equivalent of leave due at the time of retirement Rs. 30,000

iv) Actual Amount Received Rs. 75,000

EXAMPLE SHOWING HOW TO COMPUTE TAXABLE AMOUNT OF LEAVE ENCASHMENT

5)Any amount received as compensation on termination of employment [section 10B] Such compensation is tax free upto the limits

given below:

i) An amount calculated in accordance with the provisions of clause (b) of section 25F of the industrial Disputes Act;

ii) Notified Limit. The limit shall be prescribed by the Central government from time to time in official gazette this limit will not be less than Rs 5,00,000

iii) Actual compensation received , whichever is less

6) Any amount received on voluntary retirement [Section 10(10C)]

Under section 10(10c) any payment received by an employee at the time of his voluntary retirement or termination of his service, in accordance with any scheme of voluntary retirement or in case of any public sector company, a scheme of voluntary separation, is exempted being least of 4amounts as mentioned below. This exemption shall be allowed if the employee voluntary retires from following bodies:

a) A public sector company;b) Any other company;c) An Authority established under a central, state or

Provincial Act;d) A Local Authority;e) A co-operative Society;f) A university established or incorporated under a

central, state or provincial Actg) Any Indian Institution of technology within the

meaning of clause (g) of section 3 of the Institute of technology Act, 1961;

h) Such institute of management as the central government may by notification in the official Gazette, specify in this behalf.

i) Any state government ; or j) The central government

It may be noted that where this exception has been allowed to any employee for any assessment year, it shall not be allowed to him for any other assessment year.

It shall be exempted up to least of the following:

a) Statutory Limit Rs 5,00,000b) Three months salary for every completed

year of service.c) Salary for number of months remaining

serviced) Actual amount received

7)Income by way of tax on perks [Section 10(10CC)] In case employer pays, at its option, tax on

value of perks given by it to any employee (not provided by way of monetary payment) it shall be fully exempted in the hands of employee.

8)Any payment received from a Statutory Provident Fund or Public Provident Fund [Section 10(11)]

Fully exempted from tax

9) Payment received from Recognized Provident Fund [Section 10(12)] It is tax free in the following cases only:(a) The employee has rendered 5 years’ continuous service.(b) Though he has not rendered 5 years’ continuous service but

the service has come to an end because of reasons beyond his control.

The Finance Act, 1974 has added a clarification to this exemption.

If the accumulated balance standing in the name of the employee is transferred from one recognized provident fund to another similar type of fund, such balance will not be added in the total income of the assesse

The period of five years will be counted by adding the periods for which the fund remained with the previous employer to the period for which the funds remain with the present employer from whom he is getting refund.

Incase employee leaves service of his own accord before expiry of 5 years, the amount on which tax has not been paid earlier is taxable under the head salary. As such taxable amount will be:

(a) employer’s contribution to RPF- upto 12% of employee’s salary ; and

(b) Interest credited on RPF balance-upto 9.5% p.a.

10) Any payment from superannuation fund [Section 10(13)] Any payment from an approved superannuation

fund made:i) On the death of a beneficiary; orii) On retirement or on a becoming incapacitated; or iii) By way of refund of contribution on the death of a

beneficiary; oriv) Any refund of contribution of employee earlier

than his retirement or on his becoming incapacitated to the extent of his own contribution made prior to the commencement of this act and interest thereon , shall be fully exempt

11) House Rent Allowance [Section 10(13A)] Employees living in hired (rented) houses: Sometimes the employer does not provide rent free

accommodation but instead makes a provision to pay some amount in cash so that the employee maybe compensated to some extent as far as rent is concerned the amount of cash paid is known as house rent allowance

Out of total h.r.a. received an amount equal to the amount of the following three items is exempted from tax under section 10 (13A ) read with Rule 2A and balance if any will be added in the salary of the employee for tax purpose

the 3 items are i) 50 percent of salary in case of Bombay,

Calcutta, Delhi and madras and 40 percent of salary in case of all other cities or

ii) actual out house rent allowance received or iii) the amount by which the actual rent paid by

employer succeed in % of his salaryiv) Taxable HRA= Actual HRA received -

exempted amount

12) Any special allowance [Section10(14)] If any allowance is given by employer to employee

to meet certain expenditure wholly and exclusively incurred in the performance of duties it is tax-free up to the extent it is incurred for such purposes such as out of pocket allowance or outfit allowance receive4d by N.C.C. officers

This section does not grant any exemption for any allowance given to meet the expenses at a place where the employee ordinarily resides and performs duties, e.g. City Compensatory Allowance which is fully taxable.

TABLE SHOWING TREATMENT

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