I retired from State Bank of India in May this year. Kindly advise me the tax liability on the amount received on retirement by encashing earned leave to my credit as on the date of retirement, ie, May 31, 2020. I came to know from one of my former colleagues, retired from Punjab National Bank, that the amount received is fully exempt from income tax from March 1, 2018. Please clarify.

B Krishnamurthy

As per the provisions of Section 10(10AA) of the Income-Tax Act, leave encashment received by a government employee at the time of retirement is exempt from tax.

However, in case of a non-government employee, exemption for leave encashment upon retirement will be the least of the following:

  • Actual amount of leave salary received
  • Period of earned leave standing to the credit* in the employee’s account at the time of retirement
  • 10 months’ average of defined salary**
  • Maximum amount as specified by the Central government (₹3 lakh)

*‘Leave credit’ to the account of the employee at the time of retirement should be restricted to 30 days per year of service if leave entitlement as per service rules exceeds 30 days per year of actual service.

**‘Salary’ for the above purpose means average salary drawn in the 10 months immediately preceding the day of retirement) and will include basic salary, dearness allowance and commission based on fixed percentage of turnover achieved by the employee.

I understand that you are an employee of State Bank of India , which is a public sector banking and financial services statutory body, in which Government of India holds majority shares. However, the same is not considered to be a government organisation for the purpose of section 10(10AA) and thus, employees of SBI do not qualify as government employee for the purpose of calculation of exemption under the I-T Act.

This view finds support from the judgment of Delhi High Court in the case of Kamal Kumar Kalia and Others v. Union of India and Others [W.P.(C) 11846/2019]

In view of the above, leave encashment received by you at the time of retirement should be considered as exempt subject to provisions of Section 10(10AA) mentioned above, with a maximum limit of ₹3 lakh. Also, in case any such exemption for leave encashment has been taken in earlier previous years, such amount shall be reduced from the maximum exemption limit of ₹3lakh.

I had two demat accounts — one in Karvy and another in Integrated Enterprises. On closure of stock broking at Karvy, I transferred all my holdings to Integrated by giving a closure letter. My doubt is: If I sell a share (transferred from Karvy) in Integrated, what will be the purchase price for arriving capital gains? My son had a demat account in Karvy and transferred all his shares to his mother as gift. The cost of shares gifted is ₹2.49 lakh and the present value of the shares is ₹1.69 lakh. On I-T filing, if my wife sells the gifted shares what, will be the cost for capital gain purpose?

K Nagarajan

Regarding the first query, if you sell the shares transferred from Karvy to Integrated Enterprises, the purchase price for the purpose of calculation of capital gains, as per provisions of the I-T Act shall be the price at which the shares were originally purchased by you. The transfer of share from one demat account to another of the same person will not be considered as transfer to compute capital gains, if any. However, please note that depending on the period of holding of the shares (long/short term) you would still be required to calculate the cost of acquisition of the shares as per the applicable provisions.

Regarding the second query, as per Section 49(1) of the I-T Act, where the capital asset becomes property of the assessee under a gift, the cost of the asset shall be considered as the cost at which the previous owner had acquired it. Thus, for the purpose of calculating the cost of acquisition of shares received by your wife from your son, the purchase price shall be considered as the price at which your son had acquired those shares.

The writer is a practising chartered accountant

Related Topics
comment COMMENT NOW