Hi,

Encashment of leave at the time of retirement is dealt with in Section 10(10AA) of the Income Tax Act. The exemption is available to the Government and other employees in below manner:

A. Govt Employees(Central Govt and State Govt) :

The amount of leave encashment received by govt employees on retirement is fully exempt from tax. Means no tax liability on encashment of earned leave at the time of retirement.

B. Other Employees:

Least of the below is exempted other employees from the amount received towards Leave encashment at the time of retirement (whether on superannuation or otherwise):

1. Leave encashment actually received
2. 10 months “average salary”
3. Cash equivalent of unveiled leave (Maximum 30 days leave X Completed Year of service).
4. Maximum Amount as specified by the Govt i.e. Rs. 3,00,000

Here we need to remember the following terms:

1. “Salary” for the above purpose means “Basic + Dearness Allowance” including commission received if any based on a fixed percentage of turnover.
2. “Average Salary” means the average salary drawn by the employee during the period of 10 months immediately preceding his retirement.
3. Relief Sec 89: Employees in service can claim relief under section 89 of the Income Tax Act.

Regards

Hi,

The taxability of Pension depends on two factors. First Type of Pension and second type of Employee. The pension is taxable under the head of “Salary” in the hands of the receiver and in the year of receipt and tax is calculated in the following manner:

For example:- Mr. A is drawing a salary of Rs. 20,000 p.m. at the time of retirement and retires from service and becomes entitled to receive a pension of Rs 10,000 p.m. He gets half his pension commuted and receives Rs. 1,50,000/- as lump sum payment. Henceforth, he shall be entitled to a pension of Rs. 5,000 p.m. (If Ram commute his full pension then he will receive Rs 3,00,000)

Taxability:- 

1. Uncommuted Pension of Rs 5000 P.M is fully taxable.
2. Commuted Pension of Rs 1,50,000/-

If A is a Government Employee: Rs 1,50,000 is fully exempted.

If A is a non-Government Employee and also receiving Gratuity:

Exempted pension will be =  Rs 1,00,000 (1/3 X 3,00,000) and the taxable amount will be Rs 50,000/-

If A is a non-Government Employee and not receiving Gratuity:

Then Exempted pension will be =  Rs 150,000 (1/2 X 3,00,000) and the taxable amount will be Rs Nil.