Question 2 OR (b)
Salary income in the year of retirement under the new regime: gratuity, leave salary, provident fund and pension
12 marks
- Time to write
- About 24 minutes
- Topic
- Income from salaries
- Notes
- Crux notes
Question
Question 2 OR (b) · 12 marksMr. Krishna has been a senior sales manager in Shyama Co. Ltd. since 1/4/2007. His salary details for the tax year 2026-27 are:
Basic Salary (as on 1/04/2026): Rs. 50000 p.m.
D.A. (40% is part of retirement benefits): Rs. 20000 p.m.
Allowance for travelling: Rs. 10000 pm
Allowance for medical: Rs. 5000 pm
He retired from service on 01/01/2027, becoming entitled to a monthly pension of: Rs. 20000.
Gratuity (he is covered under GPA, 1972): Rs. 1400000
Recognized Provident Fund, accumulated balance: Rs. 1000000
Leave Salary: Rs. 848000
His entitlement was 20 leaves for each completed year of service, and took 200 leaves during his service.
For the tax year 2026-27, compute his taxable income under the head salary under the new tax regime. (12)
Paper note: Set under the Income-tax Act, 1961 for assessment year 2025-26 (previous year 2024-25); answered under the Income-tax Act, 2025 for tax year 2026-27, so the year term moves forward by 2 years and every date in the question moves forward by the same 2 years, so that intervals, holding periods and ages are as printed. Every figure and name is as printed. Item (ii), as printed, can be read in two ways: that 40% of the D.A. forms part of retirement benefits, or that the D.A. (Rs. 20000, which is 40% of the basic salary) forms part of retirement benefits in full. It is read here in the first way; the answer also gives the figures on the second reading.
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 2 min
- 1 Salary, allowances and pension for the year 3 marks 5 min
- 2 Gratuity under the Payment of Gratuity Act 3 marks 5 min
- 3 Leave salary 3 marks 5 min
- 4 Provident fund, standard deduction and total 3 marks 5 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 24 minutes for 12 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.
- Mr. Krishna is taxed under the default regime of section 202(1). The deductions for gratuity, leave salary and the provident fund remain available under it (section 202(2) withdraws only Sl. No. 1 of section 19(1), professional tax, among the salary deductions).
- The salary items are for the nine months of service, April to December 2026; his salary did not change in that period, so the last ten months' average equals the monthly figure.
- The travelling allowance is a fixed monthly allowance with no claim of expenses on official tours, so it is wholly taxable; the medical allowance is also taxable.
- Wages for the Payment of Gratuity Act are basic pay and all dearness allowance; salary for leave salary is basic pay and the dearness allowance forming part of retirement benefits (section 19(2)(b)). Item (ii) is read as 40% of the D.A. forming part of retirement benefits (paper note); the other reading is shown at the end.
- The provident fund balance carries no interest on his own contributions above the yearly limit that would be taxed.
| Item | Working | Amount |
|---|---|---|
| Service | 1/4/2007 to 31/12/2026 | 19 years 9 months |
| Years for gratuity (part above six months counts) | 20 | |
| Completed years for leave | 19 | |
| Last drawn wages for gratuity | ₹50,000 + ₹20,000 | ₹70,000 |
| Average salary for leave salary | ₹50,000 + 40% of ₹20,000 | ₹58,000 |
Gratuity (section 19(1), Table: Sl. No. 5; Payment of Gratuity Act, 1972, section 4(2)-(3))
| Exempt: the least of | Rs. |
|---|---|
| (a) Gratuity received | 14,00,000 |
| (b) 15/26 × last drawn wages × years of service = 15/26 × ₹70,000 × 20 | 8,07,692 |
| (c) Ceiling under section 4(3) of that Act | 20,00,000 |
| Exempt | 8,07,692 |
| Taxable gratuity (14,00,000 − 8,07,692) | 5,92,308 |
Leave salary (section 19(1), Table: Sl. No. 14)
Leave at credit: entitlement 20 days a year (within the 30-day ceiling) × 19 completed years = 380 days, less 200 days taken = 180 days.
| Exempt: the least of | Rs. |
|---|---|
| (a) Cash equivalent of leave at credit: 180/30 × ₹58,000 | 3,48,000 |
| (b) Ten months' average salary: 10 × ₹58,000 | 5,80,000 |
| (c) Notified limit | 25,00,000 |
| (d) Leave salary received | 8,48,000 |
| Exempt | 3,48,000 |
| Taxable leave salary (8,48,000 − 3,48,000) | 5,00,000 |
The accumulated balance of ₹10,00,000 is paid after more than five years of continuous service, so it is wholly excluded from total income (Schedule II, Sl. No. 4, read with Schedule XI, Part A, paragraph 8).
Computation of income under the head Salaries for tax year 2026-27
| Particulars | Rs. |
|---|---|
| Basic salary: ₹50,000 × 9 | 4,50,000 |
| Dearness allowance: ₹20,000 × 9 | 1,80,000 |
| Travelling allowance: ₹10,000 × 9 | 90,000 |
| Medical allowance: ₹5,000 × 9 | 45,000 |
| Pension (uncommuted): ₹20,000 × 3 (January to March 2027) | 60,000 |
| Gratuity (taxable part) | 5,92,308 |
| Leave salary (taxable part) | 5,00,000 |
| Recognised provident fund balance | Nil |
| Gross salary | 19,17,308 |
| Less: Standard deduction (section 19(1), Table: Sl. No. 2(a)) | 75,000 |
| Income under the head Salaries | 18,42,308 |
The other reading of item (ii)
If the whole D.A. of ₹20,000 forms part of retirement benefits (reading the 40% as the D.A.'s ratio to the basic salary), the average salary for leave salary is ₹50,000 + ₹20,000 = ₹70,000. The cash equivalent of the leave at credit becomes 180/30 × ₹70,000 = ₹4,20,000, which is the exempt amount; taxable leave salary is ₹8,48,000 − ₹4,20,000 = ₹4,28,000, and income under the head Salaries is ₹17,70,308. Gratuity is unaffected, since the Payment of Gratuity Act counts all dearness allowance.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Salary, allowances and pension for the year | 3 |
| 2 | Gratuity under the Payment of Gratuity Act | 3 |
| 3 | Leave salary | 3 |
| 4 | Provident fund, standard deduction and total | 3 |
| Total | 12 |
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