Tag: Gratuity Exemption

Management Notes

Illustrations including deduction of Retirement Benefits

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Illustration 1: Gratuity

Mr. A receives a salary of ₹8,00,000 during the year. He also receives gratuity of ₹3,00,000 on retirement. Assume ₹2,50,000 of gratuity is exempt under the applicable provisions.

Solution:

Particulars Amount
Salary ₹8,00,000
Gratuity received ₹3,00,000
Less: Exempt gratuity ₹2,50,000
Taxable gratuity ₹50,000
Gross Salary ₹8,50,000

If standard deduction of ₹50,000 is applicable:

Taxable Salary = ₹8,50,000 − ₹50,000 = ₹8,00,000

illustration 2: Leave Encashment

Mr. B receives salary of ₹7,00,000 and leave encashment of ₹4,00,000 at the time of retirement. Assume ₹3,00,000 is exempt under the applicable provisions.

Solution:

Particulars Amount
Salary ₹7,00,000
Leave Encashment ₹4,00,000
Less: Exempt amount ₹3,00,000
Taxable Leave Encashment ₹1,00,000
Gross Salary ₹8,00,000
Less: Standard Deduction ₹50,000
Taxable Salary ₹7,50,000

illustration 3: Pension

Mr. C receives pension of ₹3,60,000 during the year after retirement. He also receives commuted pension of ₹5,00,000. Assume ₹3,00,000 of the commuted pension is exempt under the applicable provisions.

Solution:

Particulars Amount
Pension ₹3,60,000
Commuted Pension ₹5,00,000
Less: Exempt Commuted Pension ₹3,00,000
Taxable Commuted Pension ₹2,00,000
Gross Salary ₹5,60,000
Less: Standard Deduction ₹50,000
Taxable Salary ₹5,10,000

illustration 4: Multiple Retirement Benefits

Mr. D receives the following amounts on retirement:

Salary = ₹6,00,000
Gratuity = ₹4,00,000
Leave Encashment = ₹3,00,000
Commuted Pension = ₹5,00,000

Assume the following amounts are exempt:

Gratuity = ₹3,00,000
Leave Encashment = ₹2,00,000
Commuted Pension = ₹3,00,000

Solution:

Particulars Amount
Salary ₹6,00,000
Taxable Gratuity ₹1,00,000
Taxable Leave Encashment ₹1,00,000
Taxable Commuted Pension ₹2,00,000
Gross Salary ₹10,00,000
Less: Standard Deduction ₹50,000
Taxable Salary ₹9,50,000

Thus, retirement benefits are first examined for the applicable exemption. The taxable portion is then

Management Notes

Income Not be included in the Total Income [Schedule III and Sec 11]

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Under the Income tax Act, 2025, certain incomes are specifically excluded from the computation of total income, subject to the conditions prescribed by the Act. Such income is generally referred to as exempt income. The purpose of these provisions is to provide relief for specified receipts and income earned under particular circumstances. Schedule III contains various categories of income that are not included in total income, while Section 11 provides specific exemptions relating to income of certain entities or persons subject to prescribed conditions. Exempt income is different from income on which tax is payable after deductions or rebates.

Important Categories of Exempt Income:

Particular Explanation
1. Agricultural Income Agricultural income, as defined under the Act, is generally excluded from total income subject to the applicable provisions.
2. Income of Certain Local Authorities Income covered by the specific exemption provisions applicable to qualifying local authorities may not be included in total income.
3. Income of Certain Statutory Bodies Specified income of qualifying statutory or similar bodies may receive exemption where the prescribed conditions are satisfied.
4. Income of Certain Institutions Income of specified institutions, organisations or entities may be exempt where the requirements of the Act are fulfilled.
5. Income of Charitable or Religious Trusts Income applied or accumulated for charitable or religious purposes may receive exemption subject to the conditions prescribed under the relevant provisions.
6. Certain Share of Income Certain income received by a member from an entity may be excluded where the Act specifically provides for such treatment.
7. Certain Retirement Benefits Specified retirement related receipts, such as qualifying gratuity, pension or leave encashment, may be wholly or partly exempt subject to prescribed conditions.
8. Other Specified Exemptions Other incomes specifically listed in Schedule III or covered by particular exemption provisions may be excluded from total income.

Important Points

Exemption does not mean that the income is ignored for every purpose. Certain exempt incomes may be relevant for determining tax rates, reporting requirements, or other tax computations, depending on the applicable provisions.

The taxpayer must satisfy the conditions prescribed for claiming an exemption. If the conditions are not fulfilled, the amount may become taxable under the relevant provisions.

Thus, Schedule III and Section 11 identify specific categories of income that are not included in total income, thereby providing statutory tax relief for qualifying taxpayers and transactions.

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