Profit in lieu of Salary: Taxability
The benefits that a salaried individual may get at the time of completion of service. Such benefits are taxable under the head ‘Salaries’ as ‘profits in lieu of Salaries’ as provided in section 17(3). However, in respect of some of them, exemption from taxation is granted u/s 10 of the Income Tax Act, 1961 either wholly or partly.
COMMUTATION OF PENSION (SECTION 10(10A) :
Commutated Value of pension is the pension amount retired person may choose to receive in advance. Such pension received in advance is called commuted pension.
For e.g. – At the age of 60 i.e. on retirement, you decide to receive 20% of your monthly pension in advance of the next 5 years of Rs 10,000. This will be paid to you as a lump sum. Therefore, 2000x12x5 = Rs 1,20,000 is your commuted pension. You will continue to receive Rs 8,000 (your un-commuted pension) for the next 5 years and again you will be paid your full pension of Rs 10,000.
Uncommuted Pension Received is fully taxable in all the cases.
In case of Government Employees established under Central or State Acts, the entire amount of commuted value of pension is exempt.
In case of any other employee, if the employee receives gratuity, the amount exempt as commuted pension would have been 1/3rd of the pension that would be received if 100% of the pension was commuted.
In case employee does not receive Gratuity the amount exempt would be one half of the amount of pension that would have been received if 100% of the pension was commuted
Judges of S.C. & H.C. shall be entitled to exemption u/s of commuted value upto 1/2 of the pension (Circular No. 623 dated 6.1.1992).
Pension received by a family member in case of death of employee is taxed under the head income from other sources. Commuted pension received by family member is not taxable in any case. Uncommuted pension received by a family member is exempt to the extent of Rs. 15,000 or 1/3rd of the uncommuted pension received whichever is less is exempt from tax.
Now, suppose an individual receives a pension of Rs. 4000 per month i.e. Rs. 48000. He can claim the standard deduction of Rs. 40000 u/s 16 of the Income Tax Act, 1961 and the net amount that would be taxable will be Rs. 8000.
PROVIDENT FUND (Sec. 10(11), Sec. 10(12))
Any payment received from a Provident Fund under Provident Funds Act, 1925 or any other provident fund notified by the Central Govt., is exempt.
| Particulars | Statutory EPF | Recognised EPF | Unrecognised EPF | Public PF |
| Employer’s Contribution | Totally Exempt | Amount in excess of 12% of salary is taxable in hands of employee | Taxable on Retirement | Not Applicable |
| Employee’s Contribution (Deduction u/s 80C) | Available | Available | Not Available | Available |
| Interest Credited | Totally Exempt | Exempt upto 9.5% p.a. | Taxable On Retirement | Totally Exempt |
| Amount Received on Retirement | Totally Exempt (Section 10(12)) | Totally Exempt (Section 10(12)) | Own Contribution – Not taxable
Employer contribution – Taxable |
Totally Exempt (Section 10(11)) |
APPROVED SUPERANNUATION FUND (Sec.10(13))
Payment from an Approved Superannuation Fund will be exempt provided the withdrawal from fund is made in the circumstances specified in the section viz. death, retirement and incapacitation.
LEAVE ENCASHMENT (Section 10(10AA))
There is provision available in case of employment allowing an employee to take a number of leave during the period of employment. If, at the time of retirement any of the ordinary leaves stand to the credit of the account of employee, he is eligible to get it encashed.
Leave Encashment during service is fully taxable in all the cases. Employee may claim relief u/s 89(1) of the Income Tax Act, 1961 if the leaves pertain to previous years.
At the time of retirement:
Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.
In case of other employees, the exemption is to be limited to the least of following:
- Cash equivalent of unutilized earned leave (earned leave entitlement cannot exceed 30 days for every year of actual service)
- 10 months average salary
- Leave encashment actually received.
- A limit of Rs.3,00,000
Note that if the amount is received at time of death it is fully exempt.
COMPENSATION ON VOLUNTARY RETIREMENT SCHEME (Sec. 10(10C))
Amount received by an employee of the following Department at the time of voluntary retirement, or termination of service is exempt to the extent of Rs. 5 Lakh:
(a) Public Sector Company.
(b) Any other company.
(c) Authority established under State, Central or Provincial Act.
(d) Local Authority.
(e) Co-operative Societies, Universities, IITs and Notified Institutes of Management.
(f) Any State Government or the Central Government.
Where exemption has been allowed under above section for any assessment year, no other exemption shall be allowed. Further, where any relief u/s 89 for any assessment year in respect of any amount received or receivable or voluntary retirement or termination of service has been allowed, no exemption under this clause shall be allowed for any assessment year.
RETRENCHMENT COMPENSATION (Sec. 10(10B)):
Retrenchment is the termination of an employee by an employer for reasons like accident at work place or physical injury etc. Employees terminated in such a manner are financially compensated by the employer. This kind of compensation is known as retrenchment compensation. Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947 or any other Act or Rules is exempt subject to following limits:-
- Compensation calculated @ fifteen days average pay for every completed year of continuous service or part thereof in excess of 6 months.
- The above is further subject to an overall limit of Rs.5,00,000 for retrenchment on or after 1.1.1997
GRATUITY (Sec. 10(10)):
Payment of Gratuity Act, 1972 requires few companies to pay Gratuity to the employees This gratuity is exempt upto a certain limit.
To know more about taxability of gratuity in detail refer the link below.
https://thetaxtalk.com/2018/08/04/gratuity-limit-exceeds-to-rs-20-lakhs/
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