Question 2 (a)
Exempt gratuity of an employee not covered by the Payment of Gratuity Act, and salary income under section 115BAC (as set, 1961 Act, AY 2022-23)
7 marks
- Time to write
- About 14 minutes
From an older CBCS paper
Question
Question 2 (a) · 7 marksMr. Ravi, who was a General Manager of XYZ Ltd., retired on 30th June, 2021 from the company. When he retired, his basic salary was Rs. 50,000 per month. He was further entitled to dearness allowance @30% of his basic salary, of which 80% is taken into account when after retirement benefits are calculated. He had served the company for 12 years, 11 months and 15 days. On his retirement the company paid a gratuity of Rs. 5,00,000 to him. Compute the amount of gratuity exempted if he is not covered by the payment of Gratuity Act.
Further, compute the income chargeable under the head of salary in case MR. Ravi has chosen the alternate tax regime under section 115BAC.
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. No marks are printed for this part; 7 inferred (11 for the question, the computation 7 and the short theory part 4). "MR. Ravi" and the lower-case "payment" in "payment of Gratuity Act" stand as printed. The assessment year is not stated in this part; the retirement date 30th June, 2021 falls in the previous year 2021-22.
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
- Compute…Two asks in one question: answer both.
- 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 Average salary and completed years 2 marks 4 min
- 2 The three limits and the exempt gratuity 2½ marks 4 min
- 3 Salary for April to June and the effect of section 115BAC 2½ marks 4 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 14 minutes for 7 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.
- Salary for gratuity. Basic salary ₹50,000 a month and dearness allowance 30% of it (₹15,000), of which 80% (₹12,000) counts for retirement benefits. Average salary = ₹50,000 + ₹12,000 = ₹62,000 a month, the pay being taken as the same for the ten months before the month of retirement (August 2020 to May 2021).
- Service. 12 years, 11 months and 15 days: 12 completed years (a part of a year is ignored for an employee outside the Payment of Gratuity Act, 1972).
- Salary of the year. He retired on 30th June, 2021, so his salary for 2021-22 is for April, May and June 2021. No pension or other income is given.
Gratuity exempt under section 10(10)(iii)
The exemption is the least of:
| Particulars | ₹ |
|---|---|
| (a) The limit notified by the Central Government | 20,00,000 |
| (b) Half a month's average salary for each completed year: ½ × 62,000 × 12 | 3,72,000 |
| (c) Gratuity actually received | 5,00,000 |
| Exempt: the least | 3,72,000 |
| Taxable gratuity (5,00,000 − 3,72,000) | 1,28,000 |
(CBDT Notification No. 16/2019 of 8 March 2019 (S.O. 1213(E)): ₹20,00,000 for employees who retire on or after 29 March 2018.)
Income under the head Salaries under section 115BAC
| Particulars | ₹ |
|---|---|
| Basic salary, April to June 2021: ₹50,000 × 3 | 1,50,000 |
| Dearness allowance at 30%: ₹15,000 × 3 (all of it is taxable, whatever part counts for retirement) | 45,000 |
| Gratuity, taxable part | 1,28,000 |
| Gross salary | 3,23,000 |
| Less: standard deduction: not allowed under section 115BAC | Nil |
| Income chargeable under the head Salaries | 3,23,000 |
- Section 115BAC(2)(i) computes total income without any deduction under section 16, so the standard deduction of section 16(ia) is lost (Finance Act, 2020, section 53). The option counts only if exercised in the prescribed manner: with the section 139(1) return by a person with no business or professional income, or on or before the section 139(1) due date by one who has such income (section 115BAC(5)).
- The gratuity exemption of section 10(10) is not among the exemptions section 115BAC(2)(i) withdraws, so it stays.
If the facts are read otherwise
- Under the normal provisions (no section 115BAC option): the standard deduction of ₹50,000 is allowed (section 16(ia)), and income under the head Salaries is ₹2,73,000.
Where the 7 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Average salary and completed years | 2 |
| 2 | The three limits and the exempt gratuity | 2.5 |
| 3 | Salary for April to June and the effect of section 115BAC | 2.5 |
| Total | 7 |
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