Question 2 (b)
Exempt part of leave encashment on retirement from a private employer (as set, 1961 Act, AY 2018-19)
5 marks
- Time to write
- About 10 minutes
From an older CBCS paper
Question
Question 2 (b) · 5 marksMr. X, who was an employee of PQR Ltd., retired from the service w.e.f. 1-01-2018 after a service of 16 years and 7 months. On retirement, he received an amount of ₹ 5,00,000 as leave encashment in respect of unvailed leave of 300 days. He was entitled to leave of 40 days for every year of completed service. His salary at the time of retirement was ₹ 50,000 per month. He received an increment of ₹ 5,000 w.e.f. 1-07-2017. Calculate the amount of leave encashment that is exempt from tax. (5)
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. As printed, the leave is described as "unvailed" (unavailed) leave of 300 days. The question gives the salary at retirement as 50,000 a month, with an increment of 5,000 from 1-07-2017, and the entitlement of 40 days a year of completed service; it gives no average salary of the last ten months, which the answer will work out from these facts (recorded here, not settled).
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
- CalculateHead 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 The four limits under section 10(10AA)(ii) 1½ marks 2 min
- 2 Average salary of the last ten months 1 mark 2 min
- 3 Leave at credit at 30 days a year 1½ marks 2 min
- 4 Exempt and taxable amounts, the other reading 1 mark 2 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 10 minutes for 5 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.
- PQR Ltd. is not the Central or a State Government, so section 10(10AA)(ii) applies.
- His salary at retirement, ₹50,000 a month, already includes the increment of ₹5,000 given from 1-07-2017, so his salary was ₹45,000 a month before that date. The other reading is at the end.
- Salary is basic pay; no dearness allowance or turnover commission is given.
- He retired with effect from 1-01-2018, so the ten months before retirement are March to December 2017, and he received no leave encashment from any employer in earlier years.
Leave salary received on retirement is salary (section 17(1)(va)). For a non-government employee the exempt part is the least of four amounts (section 10(10AA)(ii) and its provisos):
- the amount notified by the Central Government, ₹3,00,000 for employees retiring after 1 April 1998 (CBDT Notification No. 123/2002 of 31 May 2002 (S.O. 588(E)));
- the leave salary actually received;
- ten months' average salary;
- the cash value of the earned leave at credit, counting leave at not more than 30 days for each year of actual service (Explanation to section 10(10AA)), on the average salary of the last ten months.
Average salary of the last ten months
| Particulars | ₹ |
|---|---|
| March to June 2017, 4 months at ₹45,000 | 1,80,000 |
| July to December 2017, 6 months at ₹50,000 | 3,00,000 |
| Salary for the ten months | 4,80,000 |
| Average salary a month (₹4,80,000 ÷ 10) | 48,000 |
Leave at credit for the exemption
| Particulars | Days |
|---|---|
| Completed years of service (16 years 7 months) | 16 |
| Leave allowed for the exemption: 30 days × 16 years | 480 |
| Leave actually earned: 40 days × 16 years | 640 |
| Less: leave unavailed at retirement | 300 |
| Leave availed during service (640 − 300) | 340 |
| Leave at credit for the exemption (480 − 340) | 140 |
The 40 days a year that the employer allows count only up to 30 days a year for the exemption, but the leave already taken is the actual leave taken.
| Particulars | ₹ |
|---|---|
| (a) Notified limit | 3,00,000 |
| (b) Leave encashment actually received | 5,00,000 |
| (c) Ten months' average salary, ₹48,000 × 10 | 4,80,000 |
| (d) Cash value of 140 days, ₹48,000 × 140 ÷ 30 | 2,24,000 |
| Exempt under section 10(10AA)(ii): the least | 2,24,000 |
| Taxable leave encashment (₹5,00,000 − ₹2,24,000) | 2,76,000 |
The leave encashment exempt from tax is ₹2,24,000; ₹2,76,000 is taxed under the head Salaries for assessment year 2018-19.
If the facts assumed are otherwise
If ₹50,000 was his salary before the increment (₹55,000 a month from 1-07-2017), the average salary is ₹53,000 a month and the exempt amount ₹2,47,333 (the cash value of 140 days; ten months' salary ₹5,30,000).
Where the 5 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | The four limits under section 10(10AA)(ii) | 1.5 |
| 2 | Average salary of the last ten months | 1 |
| 3 | Leave at credit at 30 days a year | 1.5 |
| 4 | Exempt and taxable amounts, the other reading | 1 |
| Total | 5 |
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