Tax Talk

I am a public sector bank employee and will be retiring in October this year. My terminal benefits include gratuity and leave encashment. What will be the income tax liability on these benefits?

- Shamsundar

As per the Income-tax provisions, the treatment of retiral benefits received by you shall be as follows:

Gratuity

Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 (employees of Public Sector Banks are covered under this Act) shall be exempt to the extent of 15 days salary based on the rate of salary last drawn, for every completed year of service or part thereof subject to a maximum Rs 10 lakh.

The wages for 15 days shall be calculated by dividing the monthly rate of wages last drawn by him by 26 and multiplying the quotient by 15.

Leave encashment

The least of following shall be tax exempt:

(a) Leave encashment actually received.

(b) Cash equivalent of unutilised earned leave (earned leave entitlement cannot exceed 30 days for every year of actual service)

(c) 10 months average salary

This is further subject to an overall limit of Rs 3,00,000. Salary includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

My sister withdrew her PF balance last year upon quitting the job. She is confused regarding the tax liability on the same. Though her employer has deducted TDS on the same, she wants to know if all the tax deduction benefit she claimed on her PF amount would be reversed. She has served two companies so far and her PF accumulation date starts from December 1, 2007 with the first company. After quitting the first company, she joined the second company. In the second company, she transferred the PF balance accumulated with the first one.

She left the job in December 2011 and applied for PF withdrawal soon after.

She hasn't filed the return due to the confusion surrounding it. Does she need to notify the details about her and employer's contribution in I-T return too?

- Anuj

As per the tax rules, the accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund shall be not be taxable in case any of the conditions listed below is met:

a) The individual has rendered a continuous service, for a period of five years or more, with the employer (one or more) provided he transfers his old PF accumulation in the PF maintained by his new employer and the total combined continuous period of employment with all the employers is 5 years or more.

b) The service has been terminated by reason of the employee's ill-health or by the contraction or discontinuance of the employer's business or other cause beyond the control of the employee in case the individual has not rendered such continuous service.

Since your sister has not met any of the above conditions (continuous service under both the employers taken together is less than 5 years) the withdrawal from Provident Fund account referred above will be taxable in her hands. The income so taxable has to be disclosed in the return of income. The tax on the accumulated balance shall be calculated as per the method specified under the Schedule IV of the Income-tax Act,1961.

(The author is a practising chartered accountant)

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