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    Gratuity, Leave Salary and LTA

    Gratuity

     

    1. Meaning: It is a sum paid by the Employer to his employee during retirement or simply a retirement

     

    1. Governing law: Gratuity Act 1972.

     

    1. Calculation of Gratuity: As per Gratuity Act 1972 calculation of Gratuity is made in following manner.

     

    (I)     In case of employees covered under Gratuity Act:

     

    In this case gratuity is calculated by multiplying 15 days salary(salary during time of retirement) with number of years worked with the Employer.

     

    Here salary includes Basic Pay+DA. So now the formula can be considered as:

     

    15/26*Last drawn salary*Number of years’ service.

     

    Example: If X had worked in an organisation for 20 years 9 months and his last drawn salary is Rs 25000 (Basic+DA) then Gratuity can be computed as follows

     

    Gratuity=15/26*25000*21=302884.

     

    (ii)  In case of employees not covered under Gratuity Act:

     

    In this case gratuity is calculated by multiplying 15 days Average salary with number of years worked with Employer.

     

    Here salary means (Basic+DA+Fixed percentage of commission on turnover) and Average salary means average of previous 10 months of salary from the day of retirement. So now the formula can be considered as follows:

     

    15/30*Average salary*Number of years’ service

     

    Example: If X had worked in an organisation for 22 years 3 months and his last drawn salary is Rs 35000 (Basic + DA + Fixed percentage of Commission on turnover) then Gratuity can be computed as follows

     

    Gratuity=15/30*35000*22=385000.

     

     

     

     

     

     

     

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    1. Taxability of Gratuity: As per Sec 10(10) of the Income Tax Act 1961. For this purpose, Employees are categorised into 3 types. They are as follows:

     

     

     

     

     

     

     

     

     

    • In case of Central or State or Local Authority employees any retirement benefit gratuity paid is wholly exempted from tax.

     

    • In case Employees covered under Gratuity Act:In this case the least of the following is exempted from tax and remaining is taxable.

     

    • 15/26*Last drawn salary*Number of completed year service or part thereof in excess of 6 months

     

    • Actual Gratuity received

     

     10,00,000

     

    Here, Salary means Basic Pay+DA.

     

    Example: X an employee of ABC Ltd receives Rs 6,50,000 as gratuity. He retires after completing a service of 15 years 8 months. At the time of retirement his salary was 30,000.

     

    Solution: As per the above provision taxability is

     

    • 15/26*30000*16=2,76,923

     

    • Actual gratuity received=6,50,000

     

    • 10,00,000

     

    Least of the above is 2,76,923 which is exempted from tax.

     

    So Gratuity taxable=6,50,000 – 2,76,923=3,73,077

     

     

     

     

     

     

     

     

     

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    Gratuity, Leave Salary and LTA

     

    SBS Interns' Digest                                                                                                                          www.sbsandco.com/digest

     

    • In case Employees not covered under Gratuity Act:In this case the least of the following is exempted from tax and remaining is taxable.

     

    • 15/30*Average salary*Number of years’ service

     

    • Actual Gratuity received

     

    (c)10,00,000

     

    Here, Salary means Basic Pay+DA+Fixed percentage of commission on turnover.

     

    Average salary means average of previous 10 months of salary from preceding the month of retirement.

     

    And Number of years’ service doesn’t mean Number of completed years of service.

     

    Example: X an employee of ABC Ltd receives Rs 7,50,000 as gratuity. He retires after completing a service of 15 years 8 months and average monthly salary of 10 months immediately preceding the retirement is 45,000.

     

    Solution: As per the above provision taxability is

     

    • 15/30*45,000*15=3,37,500

     

    • Actual gratuity received=7,50,000

     

    • 10,00,000

     

    Least of the above is 3,37,500 which is exempted from tax.

     

    So Gratuity taxable=7,50,000 – 3,37,500=4,12,500.

     

    Note:

     

    • Gratuity is taxable under the head “Income from Salary”on Due or Receipt basis.

     

    • Where Gratuities are received by an employee from more than one employer in the same previous year or different years, the aggregate maximum amount of Gratuity exempt from tax cannot be more than 10 lakhs.

     

     

     

     

     

     

     

     

     

     

     

     

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    Gratuity, Leave Salary and LTA

     

    SBS Interns' Digest                                                                                                                          www.sbsandco.com/digest

     

    Leave salary:

     

    • Chargeability: Sec 10(10AA) of the Income tax act, 1961.

     

    • Meaning: Generally different leaves are available to the employees which can either be utilised or may remain unutilised. Such unutilised leaves may be accumulated and may be enchased at the time of retirement or leaving the job. Such encashment of leaves is said to be Leave salary.

     

    • Tax treatment:Taxability of leave salary depends upon whether leave is encased at the time of job or at the time of retirement. Further employees are classified into two types i.e. Government employees and Non-Government employees.

     

    1. Leave salary availed during continuity of employment: It is chargeable to tax for both Government & Non-Government employees.

     

    b)Leave salary availed during retirement or leaving the job:

    1. For Government employees: It is fully exempted from tax under sec 10(10AA)(i)
    2. For Non-Government employees: In case of Non-Government employees (including an employee of Local authority or public sector unit undertaking) leave salary is exempted from tax on the basis of least of the following:

     

    • Leaves standing to the credit of the employees during the time of retirement or leaving the job (See Note 1) X Average monthly salary (See Note 2)

     

    • 10 X Average monthly salary
    • Amount specified by the government Rs 3,00,000
    • Leave encashment received during the time of retirement.

     

    Note 1: Calculation of leaves standing to the credit of an employee at the time of retirement or leaving the job is as follows:

    Step (a): Find out the duration of service in number of years (Ignore fraction of year)

    Step (b): Find out the number of leaves availed for each year (Maximum of 30 leaves)

    Step (c): Find out the earned leave actually taken or encashed (in number of days) during the time of service

     

    The computation is as follows:

     

    [Step (a) X Step (b) (minus) Step (c)]/30

     

    Note 2: “Salary” means Basic + DA + Fixed percentage of commission on turnover. “Average Salary” means average of the 10-month salary immediately preceding the retirement.

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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    Gratuity, Leave Salary and LTA

     

    SBS Interns' Digest                                                                                                                          www.sbsandco.com/digest

     

    • Flow chart to know taxability:

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Points to be remembered:

     

    1. Where leave salary is received by Non-Government employee from two or more employers may be in same or different years then the maximum amount of exemption under section 10(10AA)(ii) during the life time of the concerned employee cannot exceed Rs 3,00,000.

     

    1. Salary paid to the legal heirs of the deceased employee in respect of leaves outstanding to the credit of the employee during the time of his death is not taxable as salary.

     

    Examples:

     

    • Mr X an employee of Central government retires on Feb,28 2015 and receives Rs 5,00,000 as cash equivalent of earned leaves. Is 5,00,000 is taxable?

    Solution: As Mr X is a Government employee, leave salary of Rs 5,00,000 is wholly exempted from tax.

     

    • Mr X an employee of Central government retires on Feb,28 2014 and receives Rs 5,00,000 as cash equivalent of earned leaves. He joined Non-government organisation on 1st April, 2014.Is 5,00,000 is exempted?

     

    Solution: Yes, as Mr X received the Leave salary as Government employee, Rs 5,00,000 is exempted from tax.

     

     

     

     

     

     

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    Gratuity, Leave Salary and LTA

     

    SBS Interns' Digest                                                                                                                          www.sbsandco.com/digest

     

    • Mr X retires on Sep 30th,2014 from a private sector company after completing a service of 32 years. As per the company’s rule he is entitled to 24 days leave for each completed year of service. He has availed 120 leaves while in service. He had already encashed 300 leaves in 2010-11.The balance was encashed in 2014-15 @ 10,000 p.m. Salary for the period from Oct 2013-Mar 2014 was 15,000 p.m. and from April 14 to Sep 30 2014 was 16,000 p.m. Find the amount of leave salary exempted from tax.

     

    Solution: As per the problem X is a Non-Government employee and he had availed leave salary at the time of retirement. So, it is taxable.

     

    As per the above provisions least of the three is exempted from tax:

     

    Leaves standing to the credit of the employees during the time of retirement or leaving the job (See Note 1) X Average monthly salary (See Note 2) = 15.6 X 15,600 = 2,43,360

     

    10 X Average monthly salary = 15,600*10 = 1,56,000

     

    Amount specified by the government Rs 3,00,000

     

    Leave encashment received during the time of retirement = [32*24 (minus) 300]/30*10,000 = 1,56,000.

     

    Lower of the above is 1,56,000. So the whole leave salary is exempted from tax.

     

    Note 1:

     

    Step (a): service in number of years = 32 years

     

    Step (b): Number of leaves availed for each year (Maximum of 30 leaves) = 24 days

    Step (c): Earned leave actually taken or encashed (in number of days) during the time of service = 300

     

    So finally leaves credited at the time of retirement are [32*24 (minus) 300]/30 = 15.6 months

     

    Note 2:Average salary = Average of salary from 1st Dec-2013 to 30th Sep-14 = 15,600 (15,000*4) + (16,000*6)/10 = 15,600

     

    Leave Travel concession or Assistance

     

    1. Meaning: LTA is the remuneration paid by the employer to the employee for his travel in the country with his family or alone.

     

    1. Taxability: Sec (5) of the Income tax act 1961.

     

    1. Amount of Exemption:

     

    • Where journey is performed by Air: Amount of air economy class fare of the National carrier by the shortest route or the actual amount spent, whichever is less.

     

    • Where journey is performed by Rail: Amount of Air conditioned first class rail fare by the shortest route or the amount spent, whichever is less.

     

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    Gratuity, Leave Salary and LTA

     

    SBS Interns' Digest                                                                                                                          www.sbsandco.com/digest

     

    • Where the places of origin of journey and destination are connected by rail and journey is performed by any other mode of transport: Amount of Air conditioned first class rail fare by the shortest route or the amount spent, whichever is less.

     

    • Where the places of origin of journey and destination are not connected by rail

     

    • Where a recognised public transport system exists: First class or deluxe fare by the shortest route or the actual amount spend, whichever is less.

     

    • Where no recognised public transport system exists: Air conditioned first class rail fare by the shortest route or the amount actually spent whichever is less.

     

    1. Meaning of ‘Family’: The exemption is available in respect of fare for going anywhere in India and Family includes Spouse and children (Step child or adopted child) of the employee. It also includes parents, brothers, sisters who are wholly dependent upon the employee.

     

    1. Number of Children:The exemption is available only for 2 children born after 1 October However for children born before 1 October 1998 this condition is not applicable and also in respect of multiple births after one child i.e. children born out of multiple birth after the first child will be treated as “One child”.

     

    Example: If X had 5 children out of which 2 are born before 1 October 1998, 1 is born in June-2000 and remaining 2 are born as multiple births in 2004 then for total of 5 children the exemption is available.

     

    1. Number of journeys:The exemption is available for 2 journeys in a block of 4 calendar years commencing from 1986. If an Assessee had not availed travel concession or assistance during any of the specified 4 years, then this exemption can be claimed in the first calendar year of the next block.

     

    1. Exemption is based upon actual journey: The exemption is available only upon the actual expense incurred for thejourney i.e. if no journey then no exemption.

     

    1. No exemption is available if the family members are travelling separately without the employee who is not in leave.

     

    Employees have to furnish evidence of the expenditure being claimed as deduction on account of LTC, HRA etc., to their employer based on which the employer will compute TDS liability u/s 192, vide notification number 30/2016 dated 29/04/2016.

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