Page 206 - DCOM301_INCOME_TAX_LAWS_I

Unit 7: Income under the Head Salaries

The Supreme Court has held that if under the terms of employment, commission is payable at a Notes
fixed percentage of turnover achieved by the employee such commission would partake of the
character of ‘Salary’. Therefore, salary will be basic salary, dearness allowance (forming part of
salary for retirement benefits) and percentage commission.
“Year” means the calendar year commencing from the 1st of January and ending on the 31st
December. “Each year of completed service” means a period of twelve months’ service rendered
by the employee, reckoned from the date on which he joined service with his employer.

Example: Mr. C, who is not covered by the Payment of Gratuity Act, received a gratuity
of ` 90,000 on retirement on December 31, 2012 after serving 35 years (forms part of salary for
retirement benefits) and 8 months. His last drawn emoluments were: Basic salary ` 4,000 p.m.
Dearness allowance ` 1,000 p.m. Annual increment of ` 200 p.m. falls due on 1st October each
year. Determine the amount of gratuity exempt from tax for the assessment year 2013–14.

Solution:
In this case 35 years shall be taken as completed years of service. Average salary shall be
computed as under:

Basic salary and D.A. drawn by him during:
(i) February 1, 2012 to September 30, 2012 @ ` 4,800
(i.e. ` 3,800 + 1,000) × 8 months = 38,400
(ii) October 1, 2012 to November 30, 2012 @ ` 5,000
(i.e. ` 4,000 + 1,000) × 2 months = 10,000

Total salary for 10 months 48,400
Average salary p.m. = ` 48,400 ÷ 10 = 4,840
Hence 1/2 month’s average salary = 4,840 ÷ 2

= 2,420 p.m.
Out of 90,000 received as gratuity, the least of the following will be exempt from tax.
(i) 84,700 (being 1/2 month’s salary for each completed year of service i.e. 2,420 × 35);
(ii) 10,00,000; or
(iii) 90,000 (being gratuity actually received).

Hence, 84,700 being the least is exempt from tax and is not taxable for the assessment year
2013–14.

7.7.2 Commuted Value of Pension

(a) In case of Government employees (Central, State, Local authority or statutory corporation),
the full amount of commuted value of pension is exempted.
(b) In case of non-Government employees, the exemption is as follows:
(i) where the employee receives any gratuity, the commuted value of one-third of the
pension which he is normally entitled to receive;
(ii) where the employee does not receive any gratuity, the commuted value of one-half
of such pension.

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