1  It is the compensation received by employee at the time he leaves service .

2. This compensation may be received as per

  • Indusial dispute act
  • or as per any other act
  • or as per court order
  • or as per his employment terms .

3 Least of the following three is exempt .

  1. Actual amount received
  2. 15/26*Average Salary of last 3 months* Completed Years  of Service (even year greater than 6 month is treated as full year.)
  3. Amt Specified by Govt i.e. Rs.500000/-

 

EXAM QUESTION

Question 1

Mr. Garg received retrenchment compensation of Rs 10,00,000 after 30 years 4 months of service. At the time of retrenchment, he was drawing basic salary Rs 20,000 p.m.; dearness allowance Rs 5,000 p.m. Compute his taxable retrenchment compensation.

-a-

  Exemption is to the extent of least of the following :

   

(i)  Compensation actually received

Rs 10,00,000

(ii)Statutory Limit

Rs 500000

(i)  Amount calculated in accordance with provisions of the Industrial Disputes Act, 1947

    = [ 15 / 26 × (20,000 × 3) + (5,000 × 3) / 3  × 30 years ]

Rs  4,32,692

Minimum Exempt

Rs  4,32,692

 

   

Retrenchment compensation received

Rs 10,00,000

Less : Exemption 

Rs  4,32,692

Balance Amount taxable

Rs  5,67,308

 -ea-

Question 2

Mr. Sagar retired on 1.10.2015 receiving Rs 5,000 p.m. as pension. On 1.2.2016, he commuted 60% of his pension and received Rs 3,00,000 as commuted pension. You are required to compute his taxable pension assuming:

  1. He is a government employee.
  2. He is a non-government employee, receiving gratuity of Rs 5,00,000 at the time of retirement.
  3. He is a non-government employee and is not in receipt of gratuity at the time of retirement.

-a-

( a)    He is a government employee.    
Uncommuted pension received (October – March)  Rs 24,000  
[ (Rs 5,000 × 4 months) + (40% of  5,000 × 2 months)    
Commuted pension received      Rs 3,00,000
Less : Exempt u/s 10(10A)     Rs 3,00,000        NIL
(b)    He is a non-government employee, receiving gratuity Rs 5,00,000 at the time of retirement.
Uncommuted pension received (October – March)  Rs 24,000    
[(Rs 5,000 × 4 months) + (40% of Rs 5,000 × 2 months)]      
Commuted pension received   Rs 3,00,000  
       
Less: Exempt u/s 10(10A)      
(1/3 × Rs 300000 / 60% × 1  )    Rs 1,66,667 Rs 1,33,333
Taxable pension   Rs 1,57,333    

 

(c)    He is a non-government employee and is not in receipt of gratuity at the time of retirement.   
  Uncommuted pension received (October – March)   Rs 24,000    
[ (Rs 5,000 × 4 months) + (40% of Rs 5,000 × 2 months)]        
Commuted pension received      Rs 3,00,000  
Less: Exempt u/s 10(10A)        
(1/2 × Rs 3,00,000 / 60% × 100% )     Rs 2,50,000 Rs 50,000
Taxable pension  Rs 74,000       

-ea-

  1. Income Tax
  2. Income from Salaries
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CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 6 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .
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