Tax presentation salaries part i

Taxation of Salaries
Section 15 to 17
Vikram Singh Sankhala

What is Salary
• Normally, the term ‘Salary’ signifies the
consideration for services rendered by a
person.
• The person who renders the services is called
the ‘employee’ while the person who receives
the services and pays the consideration is
called the ‘employer’.

Nature of Relationship
• The expression ‘employment’ means
existence of relationship of master and
servant between the employer and the
employee.
• This relationship is governed by a contract of
employment whether expressed or implied
which is absolutely essential in order to tax
the amount so received under the head
‘Income from Salaries’.

Consultant versus Employee
• Thus, a medical practitioner, an advocate or a
chartered accountant not employed by the
employer but appointed as a consultant or a
retainer cannot be called an employee and
the amount so received by such persons will
not be taxable under the head ‘Salaries’.

• Where such persons are appointed in a
regular job under a contract, verbal or written
or implied, then they constitute employees
and their remuneration is taxable under the
head ‘Salaries’.

Master and Servant Relation
• A master is one who not only prescribes to the
servant the end of his work but may direct the
means also.
• A servant works under the supervision and
direction of his employer.
• An independent contractor is his own master.
• He is not under the order and control of the
person for whom he does it.

Employer Employee Relationship
• The employer employee relationship is a
contract of service as distinct from a contract
of service.

What is a Contract for Service
• The master can order what is to be done but
does not exercise detailed supervision or
control.

Contract of Service
• The master can order not only what is to be
done but also how it shall be done.

Director and Managing Director
• Fees paid to a Director are independent of any
special contract of service and fall under
‘Income from other Sources’.
• A Managing Director is an Employee and his
remuneration comes under ‘Salary’.

Tax free Salary
• When the employer has paid the tax on the
employee’s salary, the tax paid would be
considered as Salary for the employee.

MPs and Ministers
• Salaries of MP’S & MLA’S fall under Income
from other sources.
• Salaries of Ministers of the Central or State
Government fall under Salaries

Family Pension
• Pension received by employee from his
former Employer is taxed as Salaries, while
‘Family Pension’ received on his death by
members of his family, is taxed as ‘Income
from other Sources’.

PLACE OF ACCURAL OF SALARY u/s 9(1)
• SALARY , PENSION, LEAVE SALARY FOR
SERVICE RENDERED IN INDIA IS DEEMED TO
ACCRUE OR ARISE IN INDIA
• EVEN IF IT IS PAID OUTSIDE INDIA OR IT IS
PAID AFTER CONTINUATION OF EMPLOYMENT
IN INDIA COMES TO AN END.

Basis of charge [ U/S 15]
• Any salary due
• Any salaries paid or allowed
• Any arrears of salaries paid or allowed to him in the
previous year by or on behalf of any employer or a
former employer, if not charged to income tax for any
earlier previous year.

BASIS OF CHARGE u/s 15
• ACURAL SALARY + ADVANCE SALARY +
ARREARS
• SALARY IS TAX ON DUE OR RECEIPT BASIS
WHICHEVER EARLIER

Bonus
• Bonus is taxable on receipt basis. Therefore it
will be included in Salary only in the year in
which it is received.

• Sec 17 of the Income Tax Act, 1961, gives an inclusive
definition of salary. Broadly, it includes:
– Basic Salary;
– Fees, Commission and Bonus;
– Taxable portion of cash allowances;
– Taxable value of Perquisites;
– Retirement Benefits etc.

• Although all the components of salary income
are included in salary, there are certain
incomes in each of these categories which are
either fully exempt or exempt upto a certain
limit.
• The aggregate of all the above incomes, after
the exemption(s) available, if any, is known as
‘Gross Salary’.

• From the ‘Gross Salary’, the following
deductions are allowed u/s 16 of the Act to
arrive at the figure of ‘Net Salary’.
– Deduction for entertainment allowance u/s 16(ii);
– Deduction on account of any sum paid towards
tax on employment u/s 16(iii).

Entertainment Allowance
Govt. Employee Non-Govt. Employee
1. Rs.5,000/-
2. 20% of Basic Salary
3. Amount of Entertainment
allowance granted during the
previous year
Entertainment Allowance is not
deductable
Salary = Salary – Allowances – Benefits – Perquisites

COMPONENTS OF SALARY u/s 17(1)

Question 1
• Mr.Z has joined ICC Ltd. on 1st July 2005 in the
scale of Rs.15,000-1,500-21,000-2,500-31,000.
• Compute gross salary for the previous year
2008-09.

Answer 1
• Gross Salary Rs 2,29,500

Solution 1:
• Workings:
• Previous Year April to June July to March
• 2005-06 Nil 15,000
• 2006-07 15,000 16,500
• 2007-08 16,500 18,000
• 2008-09 18,000 19,500

Solution 1:
• Previous Year: 2008-09
1. Salary for (i) April 2008 to June 2008 = 18,000 × 3 =
54,000
2. (ii) July 2008 to March 2009 = 19,500 × 9 = 1,75,500
• Gross Salary Rs 2,29,500 (54,000 + 1,75,500)

Question 2
• Mr.Kabir is getting a salary of Rs.12,000 p.m. w.e.f. 1.4.2008.
• He is promoted w.e.f. 31.12.2007
• and got arrears of Rs.75,000.
• Bonus for the year 2008-09 is Rs.15,000 remains outstanding
• but bonus of Rs.12,000 for the year 2007-08 was paid on 1st
January 2009.
• In March 2009, he got two months salary i.e. April and May
2009 in advance.
• Compute the gross salary for the assessment year 2009-10.

Answer 2
• Gross Salary 2,55,000

Solution 2
• Gross Salary for the Assessment Year 2009-10
• Salary : Rs.12,000 × 12 1,44,000
• Arrears of Salary 75,000
• Bonus for the year 2008-09: (Receivable) —
• Note: Bonus is taxable on receipt basis
• Bonus for the year 2007-08: (Received) 12,000
• Advance of Salary: April & May 2009 (12,000 × 2)
24,000
• Gross Salary 2,55,000

ALLOWANCES
• Allowance is a fixed monetary amount paid by
the employer to the employee
(over and above basic salary) for meeting
certain expenses, whether personal or
for the performance of his duties.

TAXABLE VALUE OF ALLOWANCES
• The allowances are generally taxable and are to be
included in gross salary unless specific exemption is
provided in respect of such allowance. For the
purpose of tax treatment, these allowances can be
divided into 3 categories:
I. Fully taxable cash allowances
II. Partially exempt cash allowances
III. Fully exempt cash allowances

FULLY TAXABLE ALLOWANCES
• This category includes all the allowances,
which are fully taxable. So, if an
allowance is not partially exempt or fully
exempt, it gets included in this category.
The main allowances under this category are
enumerated in the following slides:

(i) Dearness Allowance and Dearness Pay
• This allowance is paid to compensate the employee
against the rise in price level in the economy.
• Although it is a compensatory allowance against high
prices, the whole of it is taxable.
• When a part of Dearness Allowance is converted into
Dearness Pay, it becomes part of basic salary for the
grant of retirement benefits
• and is assumed to be given under the terms of
employment.

(ii) City Compensatory Allowance
• This allowance is paid to employees who are
posted in big cities. The purpose is
to compensate the high cost of living in cities
like Delhi, Mumbai etc. However,
it is fully taxable.

(iii) Tiffin / Lunch Allowance
• It is fully taxable. It is given for lunch to the
employees.

(iv) Non practicing Allowance
• This is normally given to those professionals
(like medical doctors, chartered
accountants etc.) who are in government
service and are banned from doing
private practice. It is to compensate them for
this ban. It is fully taxable.

(v) Warden or Proctor Allowance
• These allowances are given in educational
institutions for working as a Warden of
the hostel or as a Proctor in the institution.
They are fully taxable.

(vi) Deputation Allowance
• When an employee is sent from his
permanent place of service to some place or
institute on deputation for a temporary
period, he is given this allowance. It is
fully taxable.

(vii) Overtime Allowance
• When an employee works for extra hours over
and above his normal hours of
duty, he is given overtime allowance as extra
wages. It is fully taxable.

(viii) Fixed Medical Allowance
• Medical allowance is fully taxable even if
some expenditure has actually been incurred
for medical treatment of employee or family.

(ix) Servant Allowance
• It is fully taxable whether or not servants have
been employed by the employee.

(x) Other allowances
• There may be several other allowances like
family allowance, project allowance,
marriage allowance, education allowance, and
holiday allowance etc. which are
not covered under specifically exempt
category, so are fully taxable.

PARTIALLY EXEMPT ALLOWANCES
• This category includes allowances which are
exempt upto certain limit and on certain
conditions.
• For certain allowances, exemption is
dependent on amount of allowance spent for
the purpose for which it was received and for
other allowances, there is a fixed limit
of exemption.

House rent allowance
• Exemption will be lowest of
– 50% of salary where residential accommodation is in Mumbai,
Kolkata, Delhi or Chennai and 40% of at other place
– Excess of rent paid over 10% of salary
– Actual allowance paid.
• Salary means basic plus DA (if forming part of retirement
benefits) plus commission (if fixed as a percentage of
turnover)
• There will be no exemption if the residential accommodation
is owned by employee or employee has not paid any rent for
residential accommodation used by him.

Question 3
• Mr. X is employed in A Ltd. getting basic pay of Rs.20, 000 per
month and dearness allowance of Rs.7, 000 per month (half
of the dearness allowance forms part of salary for the
purpose of retirement benefits). The employer has paid
bonus @Rs.500 per month, Commission @1% on the sales
turnover of Rs.20 lakhs, and house rent allowance of Rs.6, 000
per month. X has paid rent of Rs.7,000 per month and was
posted at Agra.
• Compute his gross salary for the assessment year 2009-10

Answer 3
• Gross Salary: 3,68,200

Solution 3
• Computation of Gross Salary Amount / Rs.
Basic Salary (Rs.20,000 x 12) 2,40,000
Dearness Allowance (Rs.7,000 x 12) 84,000
Bonus (Rs.500 x 12) 6,000
Commission (1% of Rs.20,00,000) 20,000
House Rent Allowance
(Rs.6,000 x 12 – Amount exempt Rs.53,800)
18,200
Gross Salary: 3,68,200

Calculation of exempt HRA
• Amount of HRA exempt is least of 3 amounts:
1. 40% of Salary (Rs.2,40,000 + Rs.42,000 +
Rs.20,000) = Rs.3,02,000
2. Actual HRA received (Rs.6, 000 x 12) = Rs.
72,000
3. Rent paid (Rs.7, 000 x 12 – 10% of salary
Rs.30, 200) = Rs. 53,800
• Amount of HRA exempt is = Rs. 53,800

Question 4
• A, is entitled to a basic salary of Rs.5,000 p.m.
and dearness allowance of Rs.1,000p.m.,
• 40% of which forms part of retirement
benefits.
• He is also entitled to HRA of Rs.2,000 p.m.
• He actually pays Rs.2,000 p.m. as rent for a
house in Delhi.
• Compute the taxable HRA.

Answer 4
• Taxable HRA
• = Rs 6,480

Solution 4
• Computation:
• Salary for HRA= Basic Pay + D.A. (considered for retirement
benefits) + Commission (if received as a fixed percentage on
turnover as per terms of employment)
• = (5,000 × 12) + (40% × 1,000 × 12) = 64,800

Solution 4
• Taxable HRA:
• Amount received during the financial year for HRA 24,000
• Less: Exemption u/s 10(13A) Rule 2A Least of the followings:
• (a) Actual amount received 24,000
• (b) 50% of Salary of Rs.64,800 32,400
• (c) Rent paid less 10% of Salary
• [2,000 × 12 – 10% of 64,800] = Rs 17,520
• Least of these is Rs 17,520 which is exempt
• Taxable HRA (Received – Exempt)(24,000 – 17,520)
• = Rs 6,480

a) Children Education Allowance
• This allowance is exempt to the extent of
Rs.100 per month per child for
maximum of 2 children (grand children are not
considered).

b) Children Hostel Allowance
• Any allowance granted to an employee to
meet the hostel expenditure on his child
is exempt to the extent of Rs.300 per month
per child for maximum of 2 children.

c) Transport Allowance
• This allowance is generally given to employees to
compensate the cost incurred in commuting
between place of residence and place of work.
• An amount uptoRs.800 per month paid is exempt.
• However, in case of blind and orthopaedically
handicapped persons, it is exempt up to Rs.
1600p.m.

Running allowance for the
transport employees
• An allowance granted to an employee working
in a transport system to meet his personal
expenses in performance of his duty in the
course of running of such transport from one
place to another is exempt upto 70% of such
allowance or Rs.6000 per month, whichever is
less.

Leave Travel Concession (LTA)
• LTA is the value of any travel concession or
assistance received from his employer by the
employee for him and his family.
• This concession can be claimed for a
maximum of two journeys in a block of 4
years.

• The reimbursement would be restricted to actual
travel expenses. However, there is an overall ceiling
on this, which is restricted to:
- Air travel Economy fare of national carrier by the
shortest route (India Airlines or Air India)
- Rail travel First class AC fare
- Road Public transport – First class or deluxe class
- If there is no recognized transport – Equivalent of
first class AC fare

III. FULLY EXEMPT ALLOWANCES
• (i) Foreign allowance
This allowance is usually paid by the government to its
employees being Indian citizen posted out of India for
rendering services abroad. It is fully exempt from tax.
• (ii) Allowance to High Court and Supreme Court Judges are
exempt from tax.
• (iii) Allowances from UNO to its employees are fully exempt
from tax.

Special Allowances for meeting
official expenditure
• Certain allowances are given to the employees
to meet
• expenses incurred exclusively in performance
of official duties and hence are exempt to the
extent actually incurred for the purpose for
which it is given.

• These include
– travelling allowance,
– daily allowance,
– conveyance allowance,
– helper allowance,
– research allowance
– and uniform allowance.

Notified Special Allowance – 10(14)
• (14) (i) any such special allowance or benefit, not being in the
nature of a perquisite within the meaning of clause (2) of section
17, specifically granted to meet expenses wholly, necessarily and
exclusively incurred in the performance of the duties of an office or
employment of profit,7
[as may be prescribed], to the extent to
which such expenses are actually incurred for that purpose ;
• (ii) any such allowance granted to the assessee either to meet
his personal expenses at the place where the duties of his office or
employment of profit are ordinarily performed by him or at the
place where he ordinarily resides, or to compensate him for the
increased cost of living, 8
[as may be prescribed and to the extent as
may be prescribed] :]
• These are prescribed in Rule 2BB of the Income Tax Rules

a)Travel on Tour or Transfer
• a)any allowance granted to meet the cost of
travel on tour or on transfer;
• Explanation : For the purpose of clause (a),
allowance granted to meet the cost of travel
on transfer includes any sum paid in
connection with transfer, packing and
transportation of personal effects on such
transfer.

b)Daily Charges
• b)any allowance, whether, granted on tour or
for the period of journey in connection with
transfer, to meet the ordinary daily charges
incurred by an employee on account of
absence from his normal place of duty;

c)Conveyance Allowance
• (c)any allowance granted to meet the
expenditure incurred on conveyance in
performance of duties of an office or
employment of profit :
• Provided that free conveyance is not provided
by the employer;

d)Helper Allowance
• (d)any allowance granted to meet the
expenditure incurred on a helper where such
helper is engaged for the performance of the
duties of an office or employment of profit;

e)Academic Allowance
• e)any allowance granted for encouraging the
academic, research and training pursuits in
educational and research institutions;

f)Uniform Allowance
• (f)any allowance granted to meet the
expenditure incurred on the purchase or
maintenance of uniform for wear during the
performance of the duties of an office or
employment of profit.

PROFIT IN LIEU OF SALARY [ U/S 17(3) ]
• profits in lieu of salaries include:
• Any compensation due or received by an employee from his
employer in connection with the termination of the
employment or due to modification of the terms and
conditions of his employment.
• Payments from an employer or former employer from
provident fund or such other funds, excluding the amounts
exempt from tax under Section 10 and excluding the
amounts of contribution made by the assessee and the
interest thereon.

Other Payments
• Any payment in the form of:
• Gratuity
• Commuted value of pension
• Retrenchment compensation
• House rent allowance
• Received or due to be received to the extent which is
not exempt, and which it does not consist of
contribution made by the employee, or interest
thereon, is taxable as profits in lieu of salary.

PROFIT IN LIEU OF SALARY [ U/S 17(3) ]
• Keyman Insurance Policy: Surrender value of the policy
endorsed in favor of the employee, or the sum received by
him at the time of retirement, will be taxable as profit in lieu
of salary.
• Lump-sum Incentives:
• Any amount due or received:
• before joining employment or
• After leaving employment,
it is Taxable as profit in lieu of salary.

Retirement Benefits
• Leave Salary
• Pension
• Gratuity
• Retrenchment Compensation
• Compensation on Voluntary Retirement
• Provident Fund

Government Employee
• In case of Gratuity full exemption is for Government
Employees and Employees of Local Authorities.
• In case of Pension, it is Government Employees and
Employees of Local Authorities and Employees of a
Corporation established by a Central, State or Provincial Act.
• In case of Leave encashment, it is only for Employees of the
Central and State Governments and not for Employees of
Local Authorities or Public Sector Undertakings.

LEAVE SALARY u/s 10(10AA)
DURING EMPLOYMENT
GOVT/NON
GOVT.
TAXED
RETIREMENT/LEAVING JOB GOVT.
FULLY EXEMTED
RETIREMENT/LEAVING JOB NON GOVT.
FULL/PARTIAL EXEMPTED

Leave encashment at the time of retirement for the non
government employees
• Minimum of the following
– Period of earned leave to the credit of employee at the
time of his retirement or leaving the job X average
monthly salary on the basis of maximum 30 days leave for
every year of actual service rendered to the employer from
whose service he has retired.
– 10 X average monthly salary
– Rs 300000
– Actually received

Salary Meaning
• Salary includes basic, DA (if taken into account for
retirement benefit),commission on turnover.
• It is calculated on the basis of average salary drawn
during the period of 10 months immediately
preceding the retirement.
• If the assessee receives leave encashment from more
than one employer ,the aggregate amount shall not
exceed Rs 300000

Question 5
• Mrs. Vandana retires on 16th October 2008 after 30 years and 8 months of
service. Salary structure is given below:
• FY 2008-09 Salary Rs.15,000 pm D.A.Rs.7,500 pm
• FY 2007-08 Salary Rs.12,000 pm D.A.Rs.6,000 pm
• 40%of dearness allowance forms a part of superannuation benefits.
• Record of Earned Leave is given below:
• Leave allowed for one year of completed service -20 days; Leave taken while in
service-150 days; Leave encashed during the year-60 days.
• Determine the gross salary in the following cases:
• (i) He retires from government service
• (ii) He retires from the service of Delhi Municipal Corporation
• (iii) He retires from the service of Life Insurance Corporation of India
• (iv) He retires from private sector

Answer 5
• Case(i) Case(ii) Case(iii) Case(iv)
• Salary for 6months & 16 days 98,000/ 98,000
98,000/ 98,000
• Dearness Allowance 49,000/ 49,000/ 49,000/ 49,000
• Taxable amount of Leave encashment Exempted/
1,24,980/ 1,24,980/ 1,24,980
• Gross Income from Salary 1,47,000/ 2,71,980/
2,71,980/ 2,71,980

Computation
• Average monthly salary for 10 months, prior to retirement:
• Salary of 6 months 16 days: (1st April 2008 to 16th October 2008) =
98,000
• Salary of 3 months 14 days: (14th December 2007 to 31st March 2008) =
41,600
• Total Basic Salary 1,39,600
• Add: Dearness allowance
• For 6 months 16 days: (1st April 2008 to 16th October 2008) = 49,000
• For 3 months 14 days: (14th December 2007 to 31st March 2008) =
20,800
• Total D.A. 69,800
• D.A. [40% of 69,800, forming part of retirement benefits] = 27,920
• Total salary of 10 months 1,67,520(1,39,600+ 27,920)
• Average Salary = 1,67,520 / 10 = 16,752

Taxable amount of Leave
Encashment
• Amount of encashment received(Based on Last drawn Salary):
• (30 x 20) – (150 +60) x (15,000 + 7,500)/ 30 = 2,92,500
• Less: Exempted u/s 10(10AA) [Least of the followings]
• (i) Actual amount received 2,92,500
• (ii) 10 months salary(preceeding the month of retirement) =1,67,520
• (iii) Leave credit on the date of retirement
• [(30 x 20) – (150 + 60) x (16,752 / 30)] = 2,17,776
• (iv) Maximum Limit 3,00,000
• Least of the above is 1,67,520
• Taxable amount of Leave encashment 1,24,980(2,92,500- 1,67,520)

Question 6
• Ms. Parineeta retired from service after 28 years
from ABC Ltd.
• Leave sanctioned by employer 45 days p.a.
• Leave availed during service 400 days.
• Leave encashment received: Rs. 4,30,000.
• Average salary for 10 months preceeding the month
of retirement Rs.15,000.
• Compute taxable amount of Leave encashment for
the Previous year 2008-09.

Answer 6
• Taxable Value of Leave Encashment 2,80,000

Computation
• Since leave sanctioned by the employer is more than 30days p.a.,
• the following calculation is required, to determine the amount of leave
credit on the date of retirement.
• Particulars
• Leave credit available on the date of retirement
• = Total Leave sanctioned during tenure of employment – Total leave
availed during service
• = [( 28 x 45) – 400] = 860
• Less: Excess leave sanctioned by the employer
• [(45– 30 days) per year x 28) = 420
• Leave credit on the basis of 30 days credit for every completed years of
service 440 (860-420)

• Leave salary on the basis of 30 days credit = Leave credit on the basis of 30 days
credit for every completed years of service × Average Monthly salary
• = 440 × (15,000/30)= 2,20,000
• Amount Received on Leave Encashment 4,30,000
• Less: Exemption u/s 10(10AA) Least of the followings:
• (i) Actual amount of Leave encashment received 4,30,000
• (ii) Average salary of the individual for the past10 months
• 15,000 x 10 months = 1,50,000
• (iii) Maximum Limit 3,00,000
• (iv) Leave at credit at the rate of 30 days p.a. for every Completed year of service
as calculated 2,20,000
• Least of these is Rs 1,50,000
• Therefore Taxable Value of Leave Encashment 2,80,000 (4,30,000-1,50,000)

PENSION SEC. 17(1) (ii)
• Pension is a periodical payment received by
an employee after his retirement and it is also
taxed as salary.

Pension may take two forms:
• Un-commuted pension:
It is periodical payment of pension - taxable as
salary
• Commuted pension:
It is a lump-sum payment in lieu of periodical
payment - exempt as per provisions explained
hereinafter.

What are the provision regarding Commuted Pension
of a Government Employee?
• Any commuted pension received by a
Government employee is wholly exempt from
tax.

What are the provision regarding Commuted Pension of a
Non-Government Employee
• In the case where the employee receives gratuity
– commuted value 1/3rd of the pension is exempt
from tax
• In other cases
– commuted value of 50% of pension is exempt
from tax

What is the new pension scheme for central
Government Employee?
• The Central Government has introduced a
new Defined Contribution Pension Scheme in
replacement of earlier Defined Benefit
Scheme w.e.f. 01-04-2004.

What are the salient features of the New
Pension Scheme?
• The scheme is applicable to all Central
Government Employees except armed forces
or employees joining after 01-04-2004
• There are two tiers viz., Tier-I and Tier-II

• Tier-I is mandatory and employees has to
make a contribution of 10% of Basic plus
dearness allowance. Government will make
equal contribution
• Tier-II is optional and employees can make
additional contribution at their discretion

• Tier-I is non-withdrawal while Tier-II is
withdrawal
• The employees can exit at or after the age
of 60 years from Tire-I
• At exit, it would be mandatory for the
employees to invest 40% of pension wealth to
purchase an annuity from an IRDA-regulated
life insurance company.

What is the employer's contribution in New
pension scheme?
• With effect from the assessment year 2005-
06, the matching contribution made by the
Central Government to Tier-I account of the
employee will be deemed as income received
by the employee during previous year
• Such contribution is deductible (to the extent
of 10% of the salary of the employee) under
section 80CCD.

• Employee’s contribution to the notified
pension scheme (to the extent of 10% of the
salary of the employee) is also deductible
under section 80CCD.
• When pension is received from this amount, it
will be chargeable to tax in the hands of the
recipient.

• No deduction will be allowed under section 80C in
respect of amounts on which deduction has been
claimed under section 80CCD.
• Salary for this purpose will include dearness
allowance, if the terms of employment so provide,
but will exclude all other allowances and perquisites.
• The aggregate amount of deduction under section
80C, 80CC and 80CCD cannot exceed Rs 1,00,000.

Tax upon Gratuity
• Govt. employees - In the case of govt.
employees the entire amount of death-cum-
retirement gratuity is exempt from tax and
nothing is therefore taxable under the head
Salaries.

Employees covered under the
Payment of Gratuity Act, 1972
• The employees covered under the Gratuity Act who receive
gratuity have been given exemption which is the minimum of
the following amounts. Gratuity received in excess of the
minimum of the amounts mentioned below is included in the
gross salary for the purposes of taxation.
– The amount of gratuity actually received.
– 15/26 times the last drawn salary for every completed
year of service or part in excess of six months.
– Rs 3,50,000
• Salary means basic plus DA and is defined Section
2(3) of the payment of Gratuity Act, 1972.

GRATUITY (cont.)
• how to find length of service -if 6mths or less then
ignored else taken as 1 full year
• what is salary: Salary means last drawn by employee
and includes dearness allowance but does not
include any bonus, commision, HRA, Overtime wages
and any other allowance(Section 2(3) of the payment
of Gratuity Act, 1972).
• how to determine 15 days salary -calculated by
dividing salary last drawn by 26 days

Not Covered under Payment of Gratuity Act.
• In the case of other employees the gratuity received or receivable on his
retirement or on his becoming incapacited prior to such retirement or
termination of his employment or any gratuity received by his heirs is
exempt to the extent of the minimum of the following amounts. The
amount received in excess of the sums mentioned below is included in the
gross salary of the employee for the purposes of taxation.
– Actual amount of gratuity received.
– Half month's average salary for every completed year of service.
(Average salary means the average of the salary drawn by the
employee for 10 months immediately preceding the month in which
he retires)
– Rs 3,50,000
• Salary includes basic, DA (if taken into account for retirement
benefit),commission on turnover

Difference
• For those covered under the payment of Gratuity Act, the meaning of the
term ‘salary’ is as per the meaning under the payment of Gratuity Act.
(Basic plus DA).
• For those not covered under the payment of Gratuity Act, Salary includes
basic, DA (if taken into account for retirement benefit),commission on
turnover if received as a fixed percentage of the turnover achieved by the
Employee.
• Length of Service for those covered under the payment of Gratuity Act is
every completed year of service or part in excess of six months.
• Length of Service for those not covered under the payment of Gratuity Act
is every completed year of service. (Part of a year will be ignored)

Question 7
• Mr. Hari retires on 15th October2008, after serving 30 years and 7 months.
• He gets Rs.3,80,000 as gratuity.
• His salary details are given below:
• FY 2008-09 Salary Rs.16,000 pm
• D.A. 50% of salary. 40% forms part of retirement benefits.
• FY 2007-08 Salary Rs.15,000 pm D.A. 50% of salary. 40% forms part of retirement
benefits
• Determine his gross salary in the following cases:
• (i) He retires from government service
• (ii) He retires from private sector, covered under Payment of Gratuity Act, 1972.
• (iii) He retires from private sector, not covered by payment of Gratuity Act

Computation 1:
• (i) The amount of gratuity received as a Government employee is fully
exempt from tax u/s 10(10)(i)

Computation 2
Computation of Taxable Gratuity
:• (ii) As an employee of private sector, covered by Payment of Gratuity Act,
1972
• Particulars:
• Amount received as Gratuity 3,80,000
• Less: Exemption u/s 10(10)(ii) Least of the followings:
• (ii) 15/26 × Last drawn salary × No. of years of completed service or part
thereof in excess of 6 months
• [15/26 × 31 × 24,000] = Rs 4,29,231
• (iii) Maximum Limit 3,50,000 Least is Rs 3,50,000
• Taxable Gratuity 30,000 (3,80,000-350,000)
• Note : Salary = Basic Pay + Dearness Allowance

Computation 3
• (iv) As an employee of a private sector, not covered by Payment of Gratuity
Act,1972
• Note: Salary = 10 months average salary preceding the month of retirement.
• = Basic Pay + Dearness Allowance considered for retirement benefits + commission
• (if received as a fixed percentage on turnover)
• Salary for the months December’06 till September ’07 shall have to be considered.
• Basic Salary: Rs.
• December ’07 to March ’08 = 15,000 x 4 = 60,000
• April ’08 to September ’08 = 16,000 x 6 = 96,000
• Total Basic Salary 1,56,000
• Add: D.A.[ 50% of 1,56,000 × 40%, forming part of
• superannuation benefits] 31,200
• Salary for 10 months 1,87,200
• Therefore, Average salary for 10 months = 1,87,200/10 = 18,720

Computation 3 (Continued)
• (iv) As an employee of a private sector, not covered by Payment of
Gratuity Act,1972
• Particulars
• Amount received as Gratuity 3,80,000
• Less: Exemption u/s 10(10)(iii) Least of the followings:
• (ii) 1/2 × Average salary × No. of fully completed years of service
• [½ × 18,720 × 30] = 2,80,800 (Least is Rs 2,80,800)
• (iii) Maximum Limit 3,50,000
• Taxable Gratuity 99,200 (3,80,000 – 2,80,800)

Question 8
• Mr. King is getting a salary of Rs.5,400 pm since 1.1.08 and dearness
allowance of Rs.3,500 pm, 50% of which is a part of retirement benefits.
• He retires on 30th November 2008 after 30 years and 11 months of
service.
• His pension is fixed at Rs.3,800 pm.
• On 1st February 2009 he gets 3/4ths of the pension commuted at
Rs.1,59,000.
• Compute his gross salary for the previous year 2008-09 in the following
cases:
• (i) If he is a government employee, getting gratuity of Rs.1,90,000
• (ii) If he is an employee of a private company, getting gratuity of
Rs.1,90,000 (Not covered under payment of Gratuity Act).
• (iii) If he is an employee of a private company but gets no gratuity.

Computation
• Previous Year 2008-09. Tenure of Service: 1.4.08 to 30.11.08 = 8 months
• Salary 43,200 (5400*8)
• D.A 28,000(3500*8)
• Post-retirement period: December’08 to March ‘09= 4 months
• Uncommuted Pension [(3,800×2)+(950×2)] = 9,500
• Avearge Salary for last ten months (5400 + 50% of 3500)=7150 (Not
covered by Payment of Gratuity Act).
• 3/4ths of the pension commuted = Rs.1,59,000
• Full Value of Commuted Pension=Amount received on commutation
divided by Percentage of pension commuted
• = 1,59,000 / 75% = 2,12,000
• Therefore full value of Pension = Rs 2,12,000

If he is a government employee, getting gratuity of Rs.1,90,000
• Salary 43,200 (5400*8)
• D.A 28,000(3500*8)
• Uncommuted Pension [(3,800×2)+(950×2)] = 9,500
• Gratuity Exempted
• Commuted Value of Pension Exempted
• Gross Salary=43,200+28,000+9500= Rs 80,700

If he is an employee of a private company, getting gratuity of Rs.1,90,000
(Not covered under payment of Gratuity Act)
• Actual amount received 1,90,000
• Less: Exempted amount(least of the followings):
• (ii) ½ x Avg.Salary x No.of years of Completed service
• [½ x 7,150 x 30] = 1,07,250
• (iii) Maximum Limit 3,50,000 Least is 1,07,250
• Taxable Gratuity 82,750(1,90,000-1,07,250)
• Commuted Value of Pension (Non-govt employee, gratuity received)
• Actual commuted value of pension received 1,59,000
• Less: Exempted u/s 10(10A)
• 1/3rd of Full Value of Commuted Pension
• [1/3 x 2,12,000] 70,667
• Taxable Commuted Value of Pension 88,333(1,59,000 – 70,667)
• Salary+DA+Uncommuted Pension=43,200+28,000+9500= Rs 80,700
• Gross Salary=82,750+88,333+80,700 = Rs 2,51,783.

If he is an employee of a private company but gets no gratuity.
• Commuted Value of Pension (Non-govt employee, gratuity not received)
• Actual commuted value of pension received 1,59,000
• Less: Exempted u/s 10(10A) = 1/2 of Full Value of Commuted Pension
• [1/2 x 2,12,000] = 1,06,000
• Full Value of Commuted Pension=Amount received on commutation/Percentage
of pension commuted
• = 1,59,000 / 75% = 2,12,000
• Taxable Commuted Value of Pension = 53,000(1,59,000-1,06,000)
• Salary+DA+Uncommuted Pension=43,200+28,000+9500= Rs 80,700
• Gross Salary=53,000+80,700 = Rs 1,33,700

Questions for Revision
• What is meant by Salary ? Discuss what is
meant by the term ‘ Employer Employee
Relationship’
• Under which head of Income are the following
to be included:
– Salaries to MPs and MLAs
– Salaries to Ministers of Central and State
Government.

• What is the difference between accrual and
receipt? Is Salary to be taxed on accrual or
receipt. Is bonus to be taxed on accrual or
receipt ?
• What are the deductions allowed under
Section 16 from the gross salary to arrive at
the Net salary ?

• What is an allowance. Give three examples of
Fully taxable allowances ?
• Discuss the taxability of the following
allowances:
– Children Education Allowance
– Children Hostel Allowance
– Transport Allowance.

• Give three examples of fully exempt
allowances ?

• To be Continued on 4th
September, 2009

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