Retirement Benefits

Taxable limits and exemptions

Overview of Employee Benefit Scenario In India

Employee Compensation

Salary

Allowances & Bonus

Employee Benefits

Overview of Employee Benefit

Employee Benefits
Voluntary

Mandatory

Provident Fund

Gratuity

Life Insurance

Leave Encashment Superannuation

Personal Accident

Mediclaim

Different forms of salary:

Retirement benefits:
1. Leave encashment salary 2. Gratuity

3. Pension
4. Provident Fund 5. Retrenchment compensation

Leave Encashment
Under the Tax Laws maximum leave that can

be accumulated is 300 days. Maximum Tax Relief Rs.3 Lacs

Leave encashment:
It is not related to casual leave For every completed year of service employee

is entitled to receive a certain number of days of paid leave. Employee either can take leave or en cash it while in service or after retirement.
Note: Any thing received while in service is

normally taxable. After retirement there are some concessions given.

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1.Received while in Service Fully taxable(government or Non government employee)

Received At the time of retirement

Government (Central/ State govt.) Employees- Exempted

Non government employee (including local authority and corporation employees) (see next slide)

1.Leave encashment
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Non-government employee (including local authority and corporation employees)

Least of the following Exempted out of leave cash received

a) 10 months average salary* b) Amount specified by the government-3,00,000 c) Actually received at the time of retirement *Average salary [Period of leave on 30 days basis (even if more Basic + % DA comes than 30 days as per service rules) for every completed year only for retirement +fixed of service ( -) leave availed while in service (-) leave encashed % of commission on sales. while in service] x (average salary)*] Note: Immediately before the
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The retirement

 Basic + DA which comes for retirement +fixed

percentage of commission only on sales.

Do not consider fixed amount of commission on sales Do not consider variable or fixed percentage of

commission on purchase

BDA employee is not a government employee as

far as the leave encashment point of view.

Note: 1.Fixed % of commission is different from

fixed amount of commission (monthly fixed amount)

Exercise-1
X an employee of the central government receives

Rs.4,00,000 as cash equivalent to leave credit to his salary on 1st Feb. 200X after his retirement.
a)How much is taxable? b)Suppose X is a private employee and received Rs.15000 as

salary and served 20 years and 3 months and taken 3 months leave while in service at the time of retirement?
c)If X had rendered 24 years and 8 months of service and he

is employee of BDA and received Rs 15,000 basic, 40% DA out of which only 60% will come for retirement purpose and 5% variable and 4% fixed commission on sales where sales achieved in the previous year was Rs.30,00,000. Leave availed while in service was 10 months and 8 months leave en cashed ? d)Suppose X receives leave encashment while in service and he is a government employee?
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Answer
a) after the retirement leave encashment by

government employee is not taxable.

b)If he is a private employee the least of the following

is exempted from the amount received Rs.4,00,000:

1.Actually received-Rs.4,00,000; 2.10 months average salary=15000 x 10=1,50,000; 3.Maximum limit=Rs.3,00,000 4. One month for each completed year of service (-)

leave availed while in service(-) leave encashed while in service x (average salary) = 20months-3month-0 months X (15,000)= 2,55,000
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How much is exempted? How much is taxable?

b) The lowest of all four is Rs.1,50,000 is exempted from Rs.4,00,000 Therefore taxable leave encashment is Rs.2,50,000. (Rs.4,00,000-1,50,000)
d) Salary received by government employee while in service is fully taxable.

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c) Working Notes: No of years of service= 24 years and 8 months=24 years

only(fraction is ignored) Average salary=15000 +(40% x 60% x15000) +(4% x 10/12)(30,00,000)=15000 +3600 +30,00,000 x10/12 x 4%/10=28,600 Rs. 30,00,000 is for 12 months but we have to calculate for ten months only before the date of retirement.

Least of the following is exempted out of Rs.4,00,000: A) Actually received-Rs.4,00,000 B) 10 months average salary-10 x 28,600=Rs.2,86,000 C) (24 months-10 months-8 months) x 28,600=Rs.1,71,600 D) Maximum limit-Rs.3,00,000
Least of the above is Rs.1,71,600 which is exempted . Therefore taxable leave salary is Rs.4,00,000-Rs.1,71,600=Rs.2,28,400

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@ Exercise-2

@Courtesy-Income tax By Dr. Singhania

X a non government employee receives

Rs.2,50,000 as leave salary at the time of retirement on February 20, 2008. On the following information, determine the amount of taxable leave salary: Basic salary Rs.15,000 per month since 2005. Duration of service : 26 years; leave at the credit of X at the time of retirement: 25 months; entitlement of leave salary: 60 days salary for every year of service and leave availed while in service: 27 months.
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Working notes for exercise-2

1. No of years:26 years equal to 26 months for our calculations because every completed year of service one month is allowed. 2.Average salary Rs.15,000

Least of the following is exempted from Rs.2,50,000 a) Actually received Rs.2,50,000 b) 10 months salary=10 x Rs.15,000=1,50,000 c) Maximum limit Rs.3,00,000 d) (26 months-27 months-8 months) x Rs.15,000=0 (as it is negative it is equal to Zero) Least exempted leave encashment is Rs.0. Therefore taxable leave encashment is Rs.2,50,000.

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Gratuity
Gratuity refers to the gracious payments made by

the employer to the employee in appreciation of the prolonged services rendered by the employee to the employer and is normally payable at the time of termination of employment or retirement or death of employee.
Eligibility: All permanent Employees with a minimum continuous service of 5 years.

Approved Gratuity Funds

Gratuity fund is generally established in the form

of a trust. A few employees become the trustees of such fund. Section 2(5) of the Act defines an approved gratuity fund as a gratuity fund which has been and continues to be approved by the Chief Commissioner or Commissioner in accordance with the rules contained in Part C of the Fourth Schedule.

Gratuity
1.Government Employee (Central,
State and local authority employees)(3)

2.Average salary: Not necessary

3.No of days in a month- Not necessary

Non Government employee covered under the payment of gratuity Act. Including statutory corporation Average salary:last drawn includes Basic+DA No of days in a month-

Non Government employee not covered under the payment of gratuity Act. Including statutory corporation Average Salary: Basic +DA comes for retirement +Fixed % of commission on sales No of days in a month-

26 days only

30 days only
Received while in service is fully taxable Received Gratuity at the time of retirement: Least of the following is exempted(next page)

4..Received while in Received while in service is service is fully taxable fully taxable Received Gratuity at the 5.Received Gratuity at time of retirement: the time of retirement Least of the following is Exempted exempted 18 see in the next page.

Non Government employee under the payment of gratuity Act. Including statutory corporation

Non Government employee under not covered under the payment of gratuity Act. Including statutory corporation

The least of the following is exempted from gratuity received: 1.(15/30) x (10 preceding months average salary) x (number of fully completed years of service) Basic + % DA for retirement + Fixed Percentage of commission on sales 2. Rs.3,50,000 3. Gratuity actually received Note: If he worked more than one company collectively more than 6 months equal to Fraction of the year is not one year considered 19

The Least of the following is exempted from gratuity received: 1.(15/26) x (last salary drawn) x (number of years of service ) i.e. Basic+DA (No commission) Year= above 6 months is considered as one year. 2.Rs.3,50,000 3.Gratuity actually received Note:

Exercise-1
Mr. X retires from service on Nov.18 200X and received Rs.3,40,000

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as gratuity after 32 years and 8 months. His salary at the time of retirement is Basic Rs.19000 and DA 40% on Basic and 4% commission on sales. Sales achieved in preceding ten months was Rs.15,00,000. Basic salary was more by Rs.2000 since 1st April 200X. 60% of DA will come for retirement purpose. Answer the following: How much is taxable gratuity? A)If Mr. X is a government employee? B) If Mr. X is a private employee who is covered under the payment of gratuity act? C) If Mr. X is a BDA employee? D) If Mr. X is a Bangalore Mahanagar palika (BMP) employee? E) If Mr. X is a XYZ public Ltd. (a Government company) employee who is not covered under the payment of gratuity Act. F) After the death of Mr. X wife receives gratuity how much taxable under the head salary?

Answer
Particulars Government employee A BDA employee BMP Employee

1.Years of service

Not applicable

Local authority= Government employee

2.Meaning of salary Not necessary

BMP is a corporation. therefore the employee and Mr. X who is a private employee who is covered under the payment of gratuity Act. Year of service=33 years. Not necessary Basic + Full DA =Rs.19,000 +40%(19000)=26,600
Least of following is exempted: 1. Rs.3,50,000 2. Gratuity actually received Rs.Rs.3,40,000 3. (15/26)x 33 x Rs.26,600=5,06,423 Least=Rs.3,40,000 exempted. Therefore nothing is taxable
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3.How much taxable?

Not taxable

Not taxable

Particulars

XYZ Public limited government company not covered under the payment of gratuity Act Fraction of the year is ignored. Therefore 32 years

Wife receives after the death of Mr.X

1.Year of service

Not required as there is no employer employee relationship after the death of Mr. X. The gratuity received is taxable under the head income under other sources. Least of the following is exempted: 1.(15/30) x32 x 28816 =Rs.4,61,056 2.Rs. 3,50,000 3.Gratuity actually received=Rs. 3,40,000 Least : Rs. 3,40,000 Therefore Gratuity received is fully exempted.
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2.Meaning of salary

Average salary 10 months preceding the month of retirement=Basic+DA which comes for retirement +fixed % of commission= January to October salary= Jan to March Rs.17,000 each and 19000 from April to October= Rs.1,84,000 +Rs.73600 x.06 (DA) + 60000 (Commission) Average salary=2,88,160/10 =Rs.28816

Pension
Regular pension received by the employee

himself ( not dead )after the retirement is taxable as salary. Family pension(after the death of husband/wife) received by wife/husband comes under income from other sources as there is no employer and employee relationship after the death of husband who was an employee.
Standard deduction is available ie. 1/3 rd of family pension or 15,000 whichever is lower is deductible from family pension.
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Commuted pensionSec.17(1)(ii)
Instead of receiving monthly pension

some portion of regular pension can be accumulated and can be received (after retirement/voluntary retirement). This lump sum is known as commuted pension. 1. Government employee -Exempted after retirement. Government employee means:-Central, state, local authority and corporation employees(totally 4)
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Non Government employee commuted pension

If gratuity received, Maximum 1/3 of the

regular pension can be commuted which is not taxable. If gratuity is not received, of the regular pension can be commuted which is not taxable. Note: above those limits are taxable for non government employees
Example in the next slide .
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Example commuted pension

Mr. X receives pension every month

Rs.10,000. He wants to commute some portion of the pension. ? How much can he commute if: A) he is a state government employee B) he is a Bangaluru development authority employee. C) He is receiving gratuity from Karnataka Government. D) He is an employee of Shanthi Ltd.
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Answer for commuted pension

A,B and C all are government employees

therefore any amount of pension commuted are exempted . It is because government never exceeds the statutory limit of 1/3 or depending on the situation.
D) If he an employee of Shanthi Ltd.: Max.1/3 if he

receives gratuity ie 1/3(10,000)=Rs.3333 (Exempt) If he does not receive gratuity he can commute of pension ie. (10,000)=Rs.5,000. (Exempted) Note: remaining pension regularly received (after commutation)is taxable.
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Pension scheme-(after 1st Jan 2004)

Applicable for those joining after 1st Jan

2004 Contribution made by employer taxable Employer and employees contribution to the extent of 10% is deductible as saving U/S 80CCD. Beyond 10% is not deductible. When pension received fully taxed in the hands of recipient Salary=Basic +DA if it comes for retirement benefit Example-next page
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Exercise
Mr. X joined a government service on January 2007 for a

salary of Rs.40,000 per month. The government contributes towards pension scheme Rs.5000 per month. Find out how much is taxable for the year 2007-08, 2008-09 and 2009-10 previous year? Answer: 1st April-31st March 12 months salary=40,000 x12= 4,80,000 Government contribution 5000 x12= 60,000 Total 5,40,000 Less: deduction U/S 80CCD Up to 10% both by employer and employer= 4000 x2=8000 p.m. Annual Saving =8000 x12=96000 deductible from 5,40,000. Net taxable salary=Rs.5,40,000-96,000=4,44,000. (Applicable for all three years).

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Q. Does it make any difference if he had joined XYZ Ltd?

Does it make any difference if he had joined XYZ Ltd?

No. It is because this provision is applicable

both for government and any other employer.

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Annuity [17(1)(ii)]
Annual payment constantly paid by employer

to employee. Even paid voluntarily it is taxable Annuity received from ex employer is taxed as profit in lieu of salary- taxed as salary.

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Retrenchment compensation[10(10B)]
The Least of the following is exempted:

1. Amount calculated as per Industrial dispute act. = (15 days salary for every completed year of service and fraction beyond 6 months ie. 25 years and 7 months=26 years.) 2. Rs. 5,00,000 notified by Government 3.The actual amount received
Exercise:-next page
Note: If approved by government, under any scheme, such amount is fully exempted.

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Exercise
Mr. X has working in BPL. Due to closing down of the

company, company pays to Mr. X Rs. 2,60,000 as compensation. He has rendered service 20 years and 8 months. Average salary was Rs.20,000. How much is taxable? How much is exempted? Answer: no of years of service=21 years 1.Compensation as per Industrial dispute 15/30(20,000)(21)=2,10,000 2.Rs.5,00,000 3.Rs.2,60,000 Least is Rs.2,10,000 is exempted. Therefore 50,000 is taxable ie (2,60,000-2,10,000)

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VRS[10(10C)]
Voluntary Retirement scheme
Maximum amount of exemption is Rs.5,00,000. Conditions: The same employee can not be

re-employed in the same or any other company under the same management. Salary means the last salary drawn for computation of compensation Basic+ DA which comes for retirement + fixed % of commission on sales.

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Superannuation Scheme
Eligible: All employees in Management cadre

and Management /Executive trainees

Two types of Schemes
i) Defined Contribution ii) Defined Benefit

Contribution : of Benefits : benefits only of

Company contributes @ 15% employees Basic salary. Member is entitled to after completion of 5 years membership (called vesting

period). SA Allowance: allowance

Option of receiving cash

 The accumulated amount in the account of

employee is paid in the form of :

1/3rd commuted value & remaining 2/3rd in the form of pension for life.

Different options are available for pension

benefits. Balance in the members account can be transferred to the similar scheme of another company

Employees Group Insurance Scheme in conjunction with superannuation scheme

Eligible the
Benefits . employee.

All employees who are member of

Superannuation scheme. Is payable to the beneficiary of the member upon death of the

Equivalent to 2 months last drawn basic salary

multiply by number of years of future service, subject to a maximum 24 months. Basic Salary or