This is general demand of every employee who will be retired in this financial year that which retirement salary is exempt from that and what is the section of exemption. In this regard there are 5 (five) Salary component gives to Salaried Employee (Central Government/State Government Employee), which are mentioned below. Normally salaried Employee thinks that retirement salary is fully exempted from Income Tax. Thus see the tax treatment of various components of salary normally received by an employee at the time of retirements are as under:
Provident Fund:
Lump sum payment received from Statutory Provident Fund received by the Central/State/Semi State Government employee is fully exempted from Income Tax u/s 10(12).
Gratuity:
In the case of Central/State/Semi State Government employee, Gratuity amount is exempt from Income Tax u/s 10(10)(i) of the Income Tax Act, 1961.
Commutation of Pension :
Commuted pension received by a employee who has joined the Central Government before 01.01.2004 and State/Semi State Government employee joined before 01.11.2005 is fully exempt from tax u/s 10(10A)(i).
Encashment of Leave Salary :
In the case of Central/State/Semi State Government employee, any amount received as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of retirement/superannuation is exempt from tax u/s 10(10AA)(i)
Dearness Allowance/Pension :
It is taxable. Even the arrears received is also taxable. However, in respect of arrears, assessee can claim a relief u/s 89(1).
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