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FAQs

     
 
 
     

 

Income From Salary

1.
If salary for a month is not received, then can it be charged to tax?

 Salary is taxed on due or receipt basis whichever is earlier, hence, salary if due but not received will be charged to tax. Suppose if salary of March is due in March, then it will be charged to tax even if received in the month of April. 

2.
If salary is received in advance but it is not due, then is it charged to tax?

 Salary is taxed on due or receipt basis whichever is earlier, hence, salary if not due but received then will be charged to tax. Suppose if salary of March is due in April but received in March then it will be charged to tax even if it becomes due in the month of April. 

3.
What is the tax treatment of leave encashment (in the hands of Government as well as non-Government employee’s) during the continuation of service?

 Leave encashment during the continuation of service is fully taxable in the hands of Government as well as non-Government employee’s. Exemption under section 10(10AA) is available only in respect of leave encashment at the time of retirement (whether on superannuation or otherwise).

4.
What is the tax treatment of leave encashment at the time of retirement in the hands of Government employee’s?

As per section 10(10AA), leave encashment by a Government employee at the time of retirement (whether on superannuation or otherwise) fully is exempt from tax. 

5.
What is the tax treatment of leave encashment at the time of retirement in the hands of non-Government employee’s?

As per section 10(10AA), leave encashment by a non-Government employee at the time of his retirement (whether on superannuation or otherwise) is exempt. The exemption will be lower of the following amount :
1. Period of earned leave standing to the credit in the employee’s account at the time of retirement × Average monthly salary (if leave entitlement as per service rules exceeds 30 days per year of actual service, then it should be restricted to 30 days).
2. Average monthly salary × 10 (i.e., 10 month’s average salary).
3. Maximum amount as specified by the Government, i.e., Rs. 3,00,000.
4. Leave encashment actually received at the time of retirement. 

6.
While computing exemption in respect of leave encashment at the time of retirement how to compute earned leave standing to the credit in the employee’s account at the time of retirement?

While computing exemption in respect of leave encashment at the time of retirement leave standing to the credit in the employee’s account at the time of retirement will be computed as follows :

Sl. No. Particulars

1. Number of completed years of service (i.e., ignoring part of the year)

2. No. of days of leave entitlement for each year of service as per service rules (if leave entitlement as per service rules exceeds 30 days per year of actual service, then it should be restricted to 30 days)

3. Gross total leave (in days) (i.e., 1 × 2)

4. Less: Leave encashed and availed during the continuation of service (in days)

5. Period of earned leave (in days) (i.e., 3 - 4)

6. Period of leave in months (i.e., days derived at 5 above ÷ 30)

7.
While computing exemption in respect of leave encashment at the time of retirement how to compute average monthly salary?

 Average monthly salary for this purpose means average salary drawn in the past ten months immediately preceding the retirement (i.e., preceding the day of retirement). Salary for this purpose will include only following:

Basic salary.
Dearness allowance, if considered for computing all the retirement benefits. 
Commission based on fixed percentage of turnover achieved by the employee.
Apart from the above items, salary for this purpose does not include any other allowances or perquisites.

8.
What is the tax treatment of gratuity received by a Government employee?

In case of a Government employee, any death-cum-retirement gratuity received is wholly 
exempt under section 10(10)(i).

9.
What is the tax treatment of gratuity received by a non-Government employee covered by the Payment of Gratuity Act, 1972?

 Exemption in respect of gratuity received by a non-Government employee covered by the Payment of Gratuity Act, 1972 will be lower of following :

15 days salary for each completed year of service or part in excess of 6 months × years of service.
Maximum amount specified, i.e., Rs. 10,00,000.
Gratuity actually received.

10.
While computing exemption in respect of gratuity received by a non-Government employee covered by the Payment of Gratuity Act, 1972, how to compute 15 days salary?

In above case, 15 days salary will be computed as follows :

15 days salary = Salary last drawn × 15/26
Salary for this purpose will include basic salary and dearness allowance only. Items other than basic salary and dearness allowance are not to be considered.
In case of piece rated employee, 15 days’ salary will be computed on the basis of average of total wages (excluding overtime wages) received for a period of three months immediately preceding the termination of his service.
Part of the year, in excess of 6 months, shall be taken as one full year.

11.
What is the tax treatment of gratuity received by a non-Government employee not covered by the Payment of Gratuity Act, 1972?

 Exemption in case in respect of gratuity received by a non-Government employee not covered by the Payment of Gratuity Act, 1972 will be lower of the following :

Half month’s salary for each completed year of service, i.e.,
[Average monthly salary × ½] × Completed years of service. (ignore fraction of the year if any).
Rs. 10,00,000.
Gratuity actually received.

12.
While computing exemption in respect of gratuity received by a non-Government employee not covered by the Payment of Gratuity Act, 1972, how to compute half month’s salary?

 In above case, half month’s salary will be computed as follows :

Average monthly salary is to be computed on the basis of average of salary for 10 months immediately preceding the month of retirement.
Salary for this purpose will include basic salary, dearness allowance, if the terms of service so provide and commission based on fixed percentage of turnover achieved by the employee.
While computing years of service, any fraction of a year is to be ignored.
At last, average monthly salary as computed above will be divided by 2 to arrive at half month’s salary.

13.
What is the tax treatment of un-commuted pension received by a Government employee as well as non-Government employee?

Un-commuted pension received by a Government employee as well as non-Government employee is fully taxable. 

14.
14. What is the tax treatment of commuted pension received by a Government employee?

As per section 10(10A), any commuted pension, i.e., accumulated pension in lieu of monthly pension is exempt in the hands of a Government employee. 

15.
What is the tax treatment of commuted pension received by a non-Government employee?

As per section 10(10A), exemption in respect of commuted pension in case of a non-Government employee will be as follows :
If the employee receives gratuity, one third of full value of commuted pension will be exempt from tax under section 10(10A).

If the employee does not receive gratuity, one half of full value of commuted pension will be exempt from tax under section 10(10A).