Retirement benefits, taxable income and tax of a retired employee (as set, 1961 Act, AY 2017-18)

Readings and assumptions

1. Length of service. The printed dates (joined 1.1.1984, retired 31.01.2017) give 33 years and one month, while the paper says 30 years and one month. The answer follows the dates, so 33 completed years count; the result on the printed 30 years is given at the end.
2. Age. He joined at 30 in January 1984, so he is about 63 during 2016-17: a resident senior citizen (60 or more at any time in the previous year, as the Explanation to section 80D and section 207(2) use the term). On either reading of his service he is at least 60. He is taken to be resident.
3. Dearness allowance. The leave encashment of ₹3,30,000 for 330 days is ₹1,000 a day, that is ₹30,000 a month, which is basic pay plus 50% dearness allowance; so the answer takes the dearness allowance to count as salary for retirement benefits. The result if it does not is given at the end.
4. The car is taken to have been transferred to him on his retirement, 31.01.2017.

Salary and pension

Pension is salary (section 17(1)(ii)). Salary last drawn is ₹20,000 + ₹10,000 = ₹30,000 a month, and the average for the ten months before retirement is the same, ₹30,000.

Gratuity

He is covered by the Payment of Gratuity Act, 1972, so section 10(10)(ii) exempts the gratuity up to the amount worked out under that Act's own gratuity formula and ceiling (Payment of Gratuity Act, 1972, section 4(2) and (3): fifteen days' wages for each completed year, a monthly wage divided by 26 for a day's wages; the ceiling was ₹10,00,000 from 24 May 2010 to 28 March 2018, as its footnotes show).

Under that Act a part of a year above six months counts as a year; his one extra month does not.

Leave encashment

Section 10(10AA)(ii) exempts the cash value of earned leave at retirement up to the least of four limits; leave is counted at no more than 30 days for each year of service (its Explanation), and salary means basic pay plus dearness allowance where the terms so provide (Fourth Schedule, Part A, rule 2(h), which section 10(10AA) adopts).

(CBDT Notification No. 123/2002 of 31 May 2002 (S.O. 588(E)): ₹3,00,000 for employees retiring after 1 April 1998.) Leave credited at 30 days a year is within the 30-day ceiling, so his whole balance of 330 days counts.

Commuted pension

He also receives gratuity, so section 10(10A)(ii)(a) exempts the commuted value of one-third of his full pension. The commuted value is the one fixed with regard to his age, his state of health, the rate of interest and the officially recognised mortality tables (section 10(10A)(ii)); the ₹3,00,000 received for two-thirds is taken as that value.

Car and gift voucher

Both are perquisites (section 17(2)(viii), which taxes the fringe benefits the rules prescribe).

• Car transferred to him. The value of a motor car the employer sells to an employee is its cost less 20% a year on the reducing balance for each completed year of use; the company's own 15% straight-line rate is not used. Bought 01.02.2014 and transferred 31.01.2017: 3 completed years. Value ₹5,00,000 × 80% × 80% × 80% = ₹2,56,000; less ₹2,00,000 recovered: perquisite ₹56,000 (Income-tax Rules, 1962, rule 3(7)(viii) and its proviso, as substituted by the Income-tax (13th Amendment) Rules, 2009).
• Gift voucher ₹6,000. A gift, voucher or token is free only when its value is below ₹5,000 in the aggregate for the previous year; at ₹6,000 in all the whole value is taxable: ₹6,000 (proviso to Income-tax Rules, 1962, rule 3(7)(iv)).

Computation of total income for assessment year 2017-18

No standard deduction exists for assessment year 2017-18, and no entertainment allowance or professional tax is given, so nothing is deducted under section 16.

Tax liability

Rates for a resident senior citizen, previous year 2016-17 (Finance Act, 2017, First Schedule, Part I, Paragraph A, item (II); Finance Act, 2017, section 2(11) and (12)):

He may claim relief under section 89 if the gratuity or the commuted pension pushed his income into a higher bracket; the question gives no data for it.

If the facts are read otherwise

• Printed service of 30 years: exempt gratuity 15/26 × ₹30,000 × 30 = ₹5,19,231, taxable ₹80,769; total income ₹6,32,770; tax liability ₹47,950 (same rates).
• Dearness allowance not part of salary for retirement benefits: exempt leave encashment falls to 10 × ₹20,000 = ₹2,00,000, taxable ₹1,30,000; total income ₹6,80,850; tax liability ₹57,860. (Gratuity is unchanged, as the 1972 Act counts dearness allowance anyway.) (Same rates: Finance Act, 2017, First Schedule, Part I, Paragraph A, item (II).)