Question 2 OR (a)
Exempt gratuity of an employee not covered by the Payment of Gratuity Act, after an earlier exemption (as set, 1961 Act, AY 2018-19)
6 marks
- Time to write
- About 12 minutes
From an older CBCS paper
Question
Question 2 OR (a) · 6 marksRaj, who was a General Manager of Reliable Company Ltd., retired from it on 10.8.2017. When he retired, his basic salary stood at ₹ 70,000 p.m. He was further entitled to dearness allowance @ 20% of his basic salary, of which 60% forms part of the salary for retirement benefits. His service with the company lasted 10 years 11 months and 15 days. His basic salary was increased by ₹ 5,000 w.e.f. 1.2.2017. On retirement, the company paid him a gratuity of ₹ 10,00,000. Earlier, Raj had worked with S. Company Ltd.; he had received gratuity from that company and had availed himself of an exemption of ₹ 3,00,000. Now compute the amount of exemption that is available out of the gratuity received from Reliable Company Ltd. The Payment of Gratuity Act does not cover him. 6
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2018-19 (previous year 2017-18), with the dates as printed.
Reworded from the university paper: names and figures differ, 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
- computeHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Provision and meaning of salary 1½ marks 2 min
- 2 Average salary of the ten months 2 marks 3 min
- 3 Least of the three amounts, with the earlier exemption 2 marks 3 min
- 4 Taxable gratuity ½ mark 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 12 minutes for 6 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.
Raj is not a Government employee and the Payment of Gratuity Act, 1972 does not cover him, so section 10(10)(iii) applies. The gratuity is exempt up to the least of:
- the gratuity actually received;
- half a month's average salary for each year of completed service, the average being taken over the ten months immediately before the month of retirement; and
- the limit the Central Government notifies, ₹10,00,000 for a retirement in August 2017 (CBDT Notification No. 43/2010 of 11 June 2010 (S.O. 1414(E)), for employees who retire on or after 24 May 2010; the higher limit of CBDT Notification No. 16/2019 applies only on or after 29 March 2018); where gratuity from an earlier employer was exempt in an earlier year, this limit is reduced by the amount so exempted (second proviso to section 10(10)(iii)).
Salary here means basic salary and the dearness allowance that the terms of employment count for retirement benefits (Explanation to section 10(10), adopting rule 2(h) of Part A of the Fourth Schedule). Only completed years count, so 10 years 11 months 15 days is 10 years.
Average salary for the ten months
He retired on 10.8.2017, so the ten months are October 2016 to July 2017. His basic salary was ₹65,000 a month until January 2017 and ₹70,000 from 1.2.2017.
| Period | Basic salary (₹) | Dearness allowance counted, 60% of 20% = 12% of basic (₹) |
|---|---|---|
| October 2016 to January 2017, 4 × ₹65,000 | 2,60,000 | 31,200 |
| February 2017 to July 2017, 6 × ₹70,000 | 4,20,000 | 50,400 |
| Total | 6,80,000 | 81,600 |
Salary for the ten months: ₹6,80,000 + ₹81,600 = ₹7,61,600; average: ₹76,160 a month.
Exemption: the least of three amounts
| Limit | ₹ |
|---|---|
| (a) Gratuity received from Reliable Company Ltd. | 10,00,000 |
| (b) ½ × ₹76,160 × 10 completed years | 3,80,800 |
| (c) Notified limit ₹10,00,000, less ₹3,00,000 exempted earlier | 7,00,000 |
| Exempt gratuity | 3,80,800 |
₹10,00,000 − ₹3,80,800 = ₹6,19,200 is taxable as salary for assessment year 2018-19. The exemption of ₹3,80,800 is the amount available out of the gratuity from Reliable Company Ltd.; the earlier ₹3,00,000 reduces only the notified limit, which does not bind here.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Provision and meaning of salary | 1.5 |
| 2 | Average salary of the ten months | 2 |
| 3 | Least of the three amounts, with the earlier exemption | 2 |
| 4 | Taxable gratuity | 0.5 |
| Total | 6 |
Report a problemopens an email to admin@getkunji.com with the question ID1204-Q2aORalready filled in.