Question 2 OR (a)
How leave salary is taxed (as set, 1961 Act, AY 2022-23)
3 marks
- Time to write
- About 6 minutes
From an older CBCS paper
Question
Question 2 OR (a) · 3 marks- Explain the provisions for taxing leave salary. (3)
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2022-23 (previous year 2021-22), with the dates as printed.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- ExplainEach point stated, then explained in a line or two.
Write it in this order
- 1 Leave salary during service ½ mark 1 min
- 2 Government employees on retirement ½ mark 1 min
- 3 Other employees: the four limits and the salary used 1½ marks 3 min
- 4 Example ½ mark 1 min
Short on time? Step 3 carries 1½ of the 3 marks: guard its minutes.
Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Leave salary is the payment an employee receives for earned leave he did not take. Its tax treatment depends on when it is received and on who the employer is.
1. Leave salary received while in service
Leave encashed during service is part of salary and is taxable in full in the year of receipt (section 17(1)). Where it covers leave earned over several years, the employee can claim relief from the higher slab (section 89).
2. Leave salary received on retirement
- Central or State Government employees: the whole of the cash equivalent of the earned leave at the time of retirement, whether on superannuation or otherwise, is exempt (section 10(10AA)(i)).
- Other employees: the exemption is the least of the following (section 10(10AA)(ii)):
- the amount actually received;
- the limit the Central Government notifies, ₹3,00,000 for employees retiring after 1 April 1998, so for retirements in 2021-22 (CBDT Notification No. 123/2002 of 31 May 2002 (S.O. 588(E)));
- ten months' salary, at the average salary of the ten months just before retirement;
- the cash equivalent of the leave at his credit, with the leave entitlement taken at no more than 30 days for each year of service actually rendered. Salary here means basic salary, dearness allowance to the extent the terms of employment count it for retirement benefits. The balance above the exemption is taxable as salary.
- The limit applies to the total exempted in a lifetime: an employee who has claimed the exemption from one employer gets only what is left of the limit from a later one (provisos to section 10(10AA)(ii)).
Example (our own): Ms. Kavita retires from a private bank on 31 January 2022 after 20 years, with 300 days of earned leave at her credit, and receives ₹4,20,000 for it. Her average salary is ₹40,000 a month and she was entitled to 30 days of leave a year. Least of: ₹4,20,000 received; ₹3,00,000; 10 × ₹40,000 = ₹4,00,000; and 300 days of leave at ₹40,000 a month, ₹4,00,000. Exempt ₹3,00,000; taxable ₹1,20,000.
Where the 3 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Leave salary during service | 0.5 |
| 2 | Government employees on retirement | 0.5 |
| 3 | Other employees: the four limits and the salary used | 1.5 |
| 4 | Example | 0.5 |
| Total | 3 |
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