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Tax Treatment of Superannuation Fund

	Particulars	Approved SAF
1.	Employer’s contribution towards PF.	In excessofRs 1,50,000 shall be taxable. [S 17(2)(vii)]
2.	Employee’s contribution towards PF. Whether deduction u/s 80C available?	Available
3.	Interest credited to PF.	Not Taxable
4.	Lump sum withdrawal from PF.	Exempted u/s 10(12)

Gratuity

1. Gratuity denotes a gratuitous (gift or present) payment made by the employer to his employee for long services rendered by him. Gratuity may be received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment.

2. Govt employee.
Gratuity received by Central Govt. or State Govt. employees including defence service employees is fully exempt from tax.

3. Private employees covered under the Payment of Gratuity Act, 1972

Least of the following is exempt :

maximum	Rs 10,00,000 (life time exemption).
Actual	Actual gratuity received.
Formula	15 working days salary (BS+100% of DA) at the time of retirement for each completed year of service	i.e. Salary at the time of retirement / 26 x 15 x Completed year of service.

Note 1: To compute completed year of service a part of month if more than 6 months is regarded as 1 year i.e. round off the months if more than 6 months. E.g. Where duration of service is 18 years 7 months. Completed year of service shall be 19 years. But where duration of service is 18 years 6 months. Completed year of service shall be 18 years.

4. Private employees receiving gratuity as per terms of employment. (not covered under the Payment of Gratuity Act, 1972 ) Least of the following is exempt :

maximum	Rs 10,00,000 (life time exemption).
Actual	Actual gratuity received.
Formula	15 days average salary [SAS= BS + DA ( ) + Commission (if)] for each completed year of service.	i.e. Average salary / 30 x 15 x Completed year of service.

Note 1 : Average salary is salary of last 10 months immediately preceding the month of retirement. E.g. Where date of retirement is 15-11-2016, subtracting 10 months from 31-10-2016, we get 1-1-2016, therefore salary of 10 months is computed from 1-1-2016 to 31-10-2016.
Note 2: To compute completed year of service, ignore the part of months. E.g. Where duration of service is 18 years 7 months. Completed year of service shall be 18 years.

5. other points

a. Gratuity received from seasonal establishment: 15 days for each completed year of service are taken as 7 days for each completed year of service in case employee is working in a seasonal establishment.

b. Meaning of completed year of service: Completed year of service means total service including service under former employer(s) provided he was not paid gratuity by former employer(s).

c. Where gratuity is received from one or more employers: The maximum amount of exemption shall not exceed the maximum limit which is Rs 10,00,000. The amount of exemption claimed earlier in the same previous year or earlier previous year shall be reduced from Rs 10,00,000.

P1: Compute taxable gratuity:

(a) If he is covered under the Payment of Gratuity Act, 1972.

(b) He is not covered under the Payment of Gratuity Act, 1972. He is paid gratuity under the terms of contract of employment.

Duration of Service	18 years 7 months.
Basic Salary	Rs 5,000 p.m.
Dearness Allowance (10% forms part of salary)	Rs 2,000 p.m.

Commission of last 10 months @ 5% based on sales.	Rs 8,000
Gratuity received	Rs 1,40,000

(B) What is taxable gratuity in the above case if you apply Situation a on the assumption that 90% of Dearness Allowance forms part of salary.

Solution :

		covered under the Gratuity Act, 1972	In case of other employees
Salary (for the purpose of gratuity is)		5,000 + 2,000 = 7,000	5,000 + 200 + (8,000 - 10) = ? 6,000
Duration of service		19 years	18 years
M	Maximum	10,00,000	10,00,000
A	Actual Gratuity received	1,40,000	1,40,000
F	Formula	7,000 - 26 x 15 x 19 = 76,731	6,000 - 30 x 15 x 18 = 54,000
Taxable Gratuity		1,40,000 - 76,731 = 63,269	1,40,000 - 54,000 = 86,000

P2: Compute taxable gratuity (a) if he is covered under the Payment of Gratuity Act, 1972 (b) He is not covered under the Payment of Gratuity Act, 1972. He is paid gratuity under the terms of contract of employment. Duration of Service 22 years. 5 months. Basic Salary 7,500 p.m. Dearness Allowance (10% forms part of salary) 1,800 p.m. Commission of last 10 months @5�sedonsales 15,000 Gratuity received 2,25,000.
Ans: 1,06,962; 1,24,020.

P3: After serving for 34 years Mr. Taxcrazy retires from service with Philips India Ltd. on 28-2-2017. He received gratuity of Rs 2,35,000. His monthly basic salary during the calendar year 2014, 2015, 2016 and 2017 has been Rs Rs 11,600, Rs 11,700 and Rs 11,800 respectively. His annual increment fell due on 1st January every year. Determine the amount of taxable gratuity.
Ans: 35,930.

Pension

1. Any amount received after retirement is called pension. It is taxable under the head salary.

2. Uncommuted pension

Uncommuted pension is a periodical payment received by an employee after his retirement and is taxed under the head salary in all cases of employees whether Govt. employee or private employee.

3. Commuted pension

If a pensioner surrenders a part of his monthly pension in exchange of a lumpsum to be paid at a time, he is said to have commuted his pension, and the lumpsum received by him is called the commuted value of pension.

a.	Central or State Govt. Local Authority, Statutory Corporation employees	Fully exempt from tax.
b.	Private employees.	Receives gratuity	Do not receive Gratuity
		1/3 of Full Value of Pension is exempt.	1/2 of Full Value of Pension is exempt.

P1: Mr. X who retires on 1-9-2016 is entitled to a pension of Rs 8,000 p.m. On 1-12-2016 he commuttes 40% of his pension for Rs 4,00,000. How much uncommuted pension and commuted pension is taxable. (a) Pension falls due on the last day of each month. (b) Pension falls due on first day of next month.

Ans: Uncommutted pension : 43,200; 38,400. Commutted pension: nil

P2: Mr. X who retires on 1-7-2016 is entitled to a pension of Rs 3,000 p.m. On 1-1-2017 he commutes 10% of his pension for Rs 36,000. How much uncommuted pension and commuted pension is taxable.

Solution:

Uncommuted Pension

salary falls due on the last day of each month (July 2016 to March 2017)
July	to	Dec	[100% of 3,000 x 6]	18,000
Jan	to	March	[90% of 3,000 x 3]	8.100
uncommuted pension				26,100

Commuted pension

Full value of pension (10% of x = 36,000; by solving x, we get)	3,60,000
Pension received	36,000
Less: exempt (3,60,000 ^ 2 = 1,80,000 limited to 36,000)	(36,000)
taxable commuted pension	Nil

Total Taxable Pension : 26,100 + 0 = 26,100.

P3: Compute taxable pension for the AY 2017-18

(a) Salary or pension falls due on the last day of each month.

(b) Salary or pension falls due on first day of next month.

i. Date of retirement 30-11-2016. Uncommuted pension 2,500 p.m. On 1-2-2017 he commutes 40% of his pension for Rs 25,000. Gratuity received 60,000.

ii. Date of retirement 31-1-2017. Uncommuted pension 4,000 p.m. On 28-2-2017 he commutes 75% pension for Rs 60,000.

Ans: (i) 12,167; 10,667. (ii) 25,000; 24,000.

P4: Miss X a Pvt. employee retires on 31-10-2016. You are required to compute Income from Salary for the AY 2017-18 if (a) Salary falls due on the last day of each month (b) Salary falls due on first day of next month.

Basic Salary 7,000 p.m.

Pension (uncommuted) 1,200 p.m.

On 31-12-2016 she gets her 90% of her pension commuted for Rs 54,000.

Ans: 75,760; 82,640.

Leave Salary

1. Leave salary is also known as salary in lieu of leave. Employees are entitled to various types of leave while they are in service. They have the option either to avail such leave or not to avail such leave.

2. Where the employee chooses of not availing the leave, the leave may either lapse or the leave which is not availed off can be encashed. If the leave is not encashed, leave gets accumulated. Accumulated leave is also known as earned leave. The other name of accumulated leave is leave standing to the credit of employee. Accumulated leave can be encashed only on the retirement or death of the employee.

3. Where the leave gets lapsed there is no tax treatment.

Tax Treatment

1. Leave encashed while in service is fully taxable whether Govt. employee or private employee.

2. Leave encashed after the cessation of office.

a.	Govt. Employee	Leave salary received is fully exempt.
b.	Private Employee	Least of the following is exempt from tax.
		Maximum	3,00,000 (life time exemption)
		Actual	Actual Leave Salary received
		Formula 1	10 x Average salary²
		Formula 2	Earned Leave (in months) x Average salary²

Note 1: Salary = SAS = BS + DA ( ) + Commission (if)

Note 2: Average salary is to be computed for last 10 months immediately preceding the date of retirement. E.g. Where date of retirement is 15-11-2016, subtracting 10 months from 15-11-2016, we get 16-1-2016, therefore salary of 10 months is computed from 16-1-2016 to 15-11-2016.

Note 3 : computation of earned leave.

Earned Leave (EL) =Leave Entitlement (LE) – Leave Availed (LA) – Leave encashed while in service.

Leave entitlement is a max. of 30 days for each completed year of service. i.e. if leave entitlement can be less than 30 days if the service rule permits but it can never be more than 30 days.

In short we can say that 1 Year = 1 month / 30 days (less than 30 days if service of employment so provides)

For computing leave entitlement only completed year of service is taken. i.e. ignore the months for duration of service. E.g. Where duration of service is 20 years 7 months. Ignoring the 7 months duration of service = 20 years. Leave entitlement as per Income tax rule shall be = 20 months or 600 days.

Note 4: Where leave salary is received from one or more employers. The maximum amount of exemption shall not exceed the maximum limit which is Rs 3,00,000. The amount of exemption claimed earlier in the same previous year or earlier previous year shall be reduced from ₹ 3,00,000.

P1: Compute earned leave as per Service Rule and as per Income Tax Rule from the following information.

	Case 1	Case 2
Duration of service	16 years 8 months	23 years 11 months
Leave entitlement as per service rule	60 days	45 days
Leave availed while in service	305 days	14 months
Leave encashed while in service	3 months	110 days

Ans: (1) 565; 85 (2) 505; 160

P2: Compute earned leave as per Income Tax Rule from the following information.
Case 1

	Case 1	Case 2
Duration of service	25 years 1 month	11 years 10 months
Leave entitlement as per service rule	40 days	35 days
Earned Leave as per service rule	300 days	8 months

Ans: 50; 185

P3: Compute taxable leave salary from the following informations.

	Case 1	Case 2	Case 3	Case 4
Duration of service	15 years 11 months	19 years 11 months	25 years 1 month	20 years 11 months
Average salary	35,000	40,000	16,000	45,000
Leave salary received	4,00,000	1,00,000	2,00,000	8,00,000
Leave entitlement as per service rule	60 days	35 days	45 days	20 days
Leave availed while in service	8 months	400 days	26 months	2 month
Leave encashed while in service	2 months	90 days	nil	nil

	Case 1	Case 2	Case 3	Case 4
Leave entitlement	450 days	570 days	25 months	400 days
Leave availed while in service	(240 days)	(400 days)	(26 months)	(60 days)
Leave encashed while in service	(60 days)	(90 days)	(nil)	(nil)
Earned leave as per income tax rule	150 days	80 days	nil	340 days
Maximum	3,00,000	3,00,000	3,00,000	3,00,000

Actual	4,00,000	1,00,000	2,00,000	8,00,000
Formula 1	3,50,000	4,00,000	1,60,000	4,50,000
Formula 2	1,75,000	1,06,667	nil	5,10,000
Taxable leave salary (Actual less least)	2,25,000	nil	2,00,000	5,00,000

P4: Compute taxable leave salary : Duration of Service 27 years 11 months. Date of retirement 30-9-2016. Basic Salary 9,800 p.m. Dearness Allowance (20% forms part of salary) 1,000 p.m. Leave salary received 2,20,000. Leave availed while in service 20 months. Leave entitlement as per service rule 1 month.
Ans: 1,50,000.

P5: Compute taxable leave salary : Duration of service 27 years 6 months. Date of retirement 15-7-2016. Basic Salary upto Dec. 31, 2015 Rs 6,000 p.m. Basic Salary from Jan. 1, 2016 Rs 7,000 p.m. Leave Salary received Rs 3,00,000. Leave availed while in service 20 months. Encashed leave of earlier years 100 days. Leave entitlement as per company rule 35 days.
Ans: 2,75,617. [Hint Avg SAS Rs 6,650]

P6: Mr. Vivek Dubey aged 65 years was an Assistant Engineer in Hewellet Packard, Delhi. He got Rs 10,000 per month as basic pay, Rs 2,000 per month as dearness allowance (under the terms of employment) and Rs 1,250 per month as house rent allowance. He resides in his own house. He got ₹ 20,000 as travelling allowance but he spent only Rs 14,000 on travelling. He also got Rs 1,499 per month as transport allowance for commutation between office and residence.

He retired on 1st January 2017 and got Rs 2,00,000 as gratuity and Rs 2,50,000 as accumulated balance in his recognised fund. His own contribution and that of the factory to this fund was equal. He also received Rs 1,44,000 being the amount of salary including dearness allowance for 12 months earned leave to his credit at the time of retirement.

He was allowed to get pension of Rs 5,000 per month three-fourths of which was commuted for Rs 1,50,000. He commenced service of this factory on 1st April 1986. Employment tax payable to State Government was Rs 2,000 but he paid only Rs 1,000 during the previous year against the due amount.

Calculate his income from salaries for the assessment year 2017-18.

Ans: 2,55,330 [BS 90,000+DA 18,000+ HRA 11,250+TA 6,000+TA 0+Grat 20,000+LS 24,000+Pension 87,083= GS 2,56,333–PT 1,000=IFS 2,55,333]

Salary for different purposes
HRA	EA	Gratuity covered	Gratuity not covered	Leave salary	PF
SAS	Basic Salary	BS+100% of DA at the time of retirement	AverageSASof last 10 months immediately preceding the month of retirement.	Average SAS of last 10 months immediately preceding the date of retirement.	SAS

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FAQs on Tax Treatment of Superannuation,Gratuity,Pension - Taxation - Income Tax for assessment (Inter Level)

1. What is the tax treatment of superannuation?

Ans. Superannuation refers to the funds set aside by individuals for their retirement. The tax treatment of superannuation varies depending on the country and specific regulations. In general, contributions made to superannuation funds are either taxed at a concessional rate or are tax-deductible. However, when withdrawing funds from a superannuation account, taxes may apply, especially if the individual is below the preservation age or exceeds their annual contribution limits. It is important to consult with a tax professional or refer to the specific tax regulations of the country to understand the exact tax treatment of superannuation.

2. How is gratuity taxed?

Ans. Gratuity is a form of payment given by an employer to an employee as a token of appreciation for their long-term service. The tax treatment of gratuity varies depending on the country and specific regulations. In some countries, gratuity is exempt from tax up to a certain limit, while any amount exceeding the threshold is taxable. The tax rate applied to the excess amount may differ based on the individual's income tax bracket. It is advisable to consult with a tax professional or refer to the specific tax regulations of the country to understand the exact tax treatment of gratuity.

3. What is the tax treatment of pension income?

Ans. The tax treatment of pension income also varies depending on the country and specific regulations. In many countries, pension income is subject to income tax. The tax rate applied to pension income may depend on various factors such as the individual's overall income, age, and any applicable deductions or exemptions. Some countries may offer certain tax reliefs or concessions for pension income, particularly for retirees. It is important to consult with a tax professional or refer to the specific tax regulations of the country to understand the exact tax treatment of pension income.

4. Are there any tax benefits associated with superannuation contributions?

Ans. Yes, in many countries, there are tax benefits associated with superannuation contributions. Individuals making contributions to superannuation funds may be eligible for tax deductions or receive concessional tax treatment. The specific tax benefits and eligibility criteria may vary based on the country's regulations. It is advisable to consult with a tax professional or refer to the specific tax regulations of the country to understand the tax benefits associated with superannuation contributions.

5. How are taxes calculated on superannuation withdrawals?

Ans. Taxes on superannuation withdrawals are calculated based on various factors such as the individual's age, the amount being withdrawn, the preservation age, and the annual contribution limits. In some countries, withdrawals made after reaching the preservation age may be tax-free, while early withdrawals may attract taxes and penalties. The tax rate applied to superannuation withdrawals may also depend on the individual's income tax bracket. It is important to consult with a tax professional or refer to the specific tax regulations of the country to understand how taxes are calculated on superannuation withdrawals.

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