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Income Tax Laws – I

Notes
Example: Mr. A is entitled to get a pension of ` 600 per month from a private company.
He gets three-fifth of the pension commuted and receives ` 36,000. Compute the taxable portion
of commuted value when:
(a) he receives ` 20,000 as gratuity

(b) he does not receive gratuity.
Solution:
Commuted value of 3/5 of pension 36,000

Commuted value of full pension i.e. 5/3 × 36,000 = 60,000
(a) If Mr. A receives gratuity:
Amount exempt shall be one third of commuted value of full pension = 1/3 ÷ 60,000 =
20,000
Commuted pension chargeable to tax as salary = (36,000 – 20,000) = 16,000
(b) If Mr. A does not receive gratuity:
Amount exempt shall be one half of commuted value of full pension = 1/2 ÷ 60,000 =
30,000
Commuted pension chargeable to tax as salary= (36,000 – 30,000) = 6,000

7.7.3 Encashment of Earned Leave

Clause 10AA of Section 10 grants the following exemptions on this account:
1. Any payment received by an employee of the Central Government or a State Government
as the cash equivalent of leave salary in respect of the period of earned leave at the
employee’s credit only at the time of retirement whether such retirement is on
superannuation or otherwise. The effect of this clause is that payments received by an
employee in respect of any period of leave not availed by him would be chargeable to tax
except, when such payments are made at retirement and qualify for exemption under
Section 10(10AA) of the Act.

2. Any payment as encashment of earned leave received from any other employer is exempt
to the extent of: For non-government employees (including employees of local authority
or statutory corporation), least of the following:
(a) Cash equivalent of the leave salary in respect of the period of earned leave standing
to the credit of employee at the time of retirement/superannuation (maximum
earned leave entitlement being: 30 days for every year of actual service rendered for
the employer from whose service he has retired); or

(b) 10 month’s “average salary”, i.e. salary drawn during the period of 10 months
immediately preceding the retirement/superannuation, or [“Salary in this context,
means, Basic salary and includes dearness allowance if terms of employment so
provide. It also includes commission based on fixed percentage of turnover achieved
by an employee as per terms of contract of employment.
(c) The amount specified by the Government. The maximum amount which is not
chargeable to tax under Section 10(10AA)(ii) of the Act, as specified by the
Government is given below:

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