Under Section 3A of the Payment of Gratuity Act, 1972 (POGA), every factory falls under the purview of POGA. Further, Section 4(5) of POGA provides a right to an employee to receive better terms of gratuity.

My company has its own gratuity trust which is recognised by the Commissioner of Income Tax (CIT) and the relevant clauses of the said trust deed offer better terms of gratuity than the statutory payment required to be made under POGA.

As referred above, every factory is covered under POGA, whether gratuity received from a recognised gratuity trust qualifies for exemption up to Rs 10,00,000 under the provisions of section 10(10)(ii) of the Income Tax Act, 1961 (the Act).

Request is made for the purpose of ascertaining the taxable part of gratuity with reference to a decided case under the cited section — S.S. Sharma

POGA applies to every factory and permits an employer maintains its own gratuity trust which offer better terms of gratuity.

As you informed, since your employer is covered under POGA and you have received gratuity under POGA, the amount exempt from tax should be computed according to Section 10(10)(ii) of the Act.

The amount of exemption shall be least of the following:

15 days salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months; or

Statutorily prescribed cap of Rs 10, 00,000; or

Actual gratuity received.

Any gratuity amount received in excess of above prescribed limit shall be taxable in your hands.

Also, any gratuity received while in service should be taxable as salary income.

The term salary includes basic salary and dearness allowance, if the terms of employment so provide, but excludes other allowances and perquisites. Also, following points must be kept note of:

If you receive gratuity from more than one employer in the same Financial Year (FY), the aggregate amount of gratuity exempt from tax should not exceed the statutorily prescribed cap of Rs10, 00,000.

In case you have received any gratuity in any of the earlier FYs from your former employer(s), and also receive gratuity from another employer in any subsequent FY's, the prescribed limit of Rs 10,00,000 would be reduced by the amount of gratuity considered as exempt from tax in any of such previous FY's.

In case your employer is not covered under POGA, amount of exemption may be computed according to the provisions of section 10(10)(iii) of the Act, subject to conditions.

If I invest in a cumulative fixed deposit in a bank, I will get full interest on the date of maturity. However, as and when the bank calculates interest (to be added to my principal), they deduct TDS. Hence, the interest is taxable every year.

When I buy NCD's where I opt for interest payment at maturity, how is the interest income treated?

1. Is the income tax payable every year by me?

2. Is the company obligated to deduct TDS?

Under the Act, there are detailed provisions relating to deduction of income tax at source (TDS) depending on the nature of income. Generally, any person responsible for paying interest to a resident, is obliged to deduct income tax at the rates in force (currently 10.3 per cent), at the time of credit or payment of such income, whichever is earlier.

Therefore, the payer of income would deduct tax at source on payment or accrual of income, whichever is earlier.

In case of interest from bank, TDS shall not be applicable where the interest credited or paid to the person does not exceed Rs 10,000 during the FY.

In case of interest on debentures, TDS shall not be applicable if:

a) interest is payable through account payee cheque, by a public company on debentures listed on recognised stock exchange in India and the amount of interest does not exceeds Rs 2,500 during the FY; or

b) debentures are in dematerialised form and listed on a recognized stock exchange in India.

Interest income should be offered to tax under the head “Income from Other Sources” in the income tax return and the same would be taxed at the rate as applicable to the individual.

Under the Act, an individual has an option to either offer income on cash (receipt) or mercantile (accrual) basis according to the method you regularly follow.

Further, credit of TDS on the said interest income can be claimed by the individual in the personal income tax return.

Where you follow accrual basis for disclosing your income you could claim credit of TDS in the same FY since both in case of interest on fixed deposit with Bank and on Non Convertible Debenture, tax would be deducted in the same year i.e. on accrual basis.

Where the interest income is offered to tax on receipt basis i.e. at the time of maturity, you should be eligible to claim credit of TDS only in the FY in which such interest income is offered to tax.

However, in such a case you must ensure that correct disclosure is made in all the forms (Form 26A, Form 16A) and returns (personal income tax, e-TDS) with respect to the year in which tax was deposited and the credit of the same is claimed.

Credit for TDS not falling in the year in which tax is withheld (as dated in the Form 16A), may be litigious, especially at lower levels.

(The author is Executive Director, Tax, KPMG)

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