Tax Advice
Leave encashment up to Rs 3 lakh tax-free
by SC Vasudeva

Q. Mr. PSEBEA retired from B as Scale 1 officer on 30/4/2010 in PB and received following dues:

(a) Gratuity — Rs 6,21000

(b) Encashment of 240 days of leave - Rs 3,76,000

(c ) PF- Rs 10,00,000

(d) Some amount was transferred into his PF account in the month of April as PF against the revised new scale (arrears for revised salary) & he retired in the end of April month. Is this new PF amount taxable? Please tell from the above dues which amounts are taxable & to what extent. How can my father reduce his tax for the details mentioned above?

— Nitin Jain

A. (a) Gratuity amount of Rs 6,21,000. The amount received in excess of Rs 3,50,000 would be taxable. The increased limit of Rs 10 lakh specified under Section 10(10)(ii) & (iii) of the Income-tax Act 1961 (The Act) is applicable where an employee retires on or after 24th May, 2010. You had retired on 30.4.2010 and therefore would not be entitled to the benefit of the increased limit of Rs 10 lakh.

(b) Leave encashment Rs 3,76,000. The amount received in respect of leave encashment is exempt from tax provided such amount does not exceed payment for 10 months leave calculated on the basis of the average salary drawn by the employee during the period of 10 months immediately preceding the retirement subject to a maximum of Rs 3 lakh only. Assuming that the leave salary amount paid to you has been calculated in the manner specified herein above, the amount received in excess of Rs 3 lakh i.e. Rs 76,000 will be taxable.

(c) The amount of Provident Fund received by you would not be taxable.

Tax-saving FDs

Q. I want a clarification on following two points:

Whether the FDR deposited in the bank under Section 80C can be prematurely withdrawn?

One of my relative has taken premature retirement on medical grounds from the bank under total incapacitation & got ex gratia of Rs 5.50 lakh. Please advise whether any rebate is allowed on this ex gratia & under which section.

— Vijay Kumar

A. (a) The fixed deposits made in a bank in accordance with the requirements of Section 80C of the Act cannot be prematurely withdrawn.

(b) In my opinion, there is no section in the Act which provides for any relief or rebate for the ex gratia amount received by an employee on termination of his employment. The only exemption provided by Section 10C of the Act is in respect of amount received on the voluntary retirement or termination of the services of an employee in accordance with any scheme or scheme of voluntary retirement or in the case of public sector company, scheme of voluntary separation to the extent such amount does not exceed Rs 5 lakh. If your friend is covered within the aforesaid scheme, an amount to the extent of Rs 5 lakh would be exempt from tax.