• Jun 07, 24
• bhushanbjain
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An approved superannuation fund under income tax is a retirement savings scheme that has been approved by the Indian government. It is a tax-efficient way to save for retirement, as employers’ contributions to the fund are tax-deductible, and employees’ contributions are exempt from tax up to a certain limit.

The income earned by an approved superannuation fund is also exempt from tax. This means that the money in the fund can grow tax-free until it is withdrawn in retirement.

There are certain conditions that a superannuation fund must meet in order to be approved by the government. These conditions include:

• The fund must be established for the purpose of providing retirement benefits to its members.
• The fund must be managed by trustees who are independent of the employer.
• The fund must have a set of rules that govern its operation.
• The fund must be registered with the Income Tax Department.

Some examples of approved superannuation funds in India include:

• Central Government Employees’ Pension Fund (CGEPF)
• Employees’ Provident Fund (EPF)
• National Pension System (NPS)
• Public Sector Undertakings’ Superannuation Schemes

EXAMPLES

• Andhra Pradesh Superannuation Fund (APSF)
• Karnataka State Government Employees’ Superannuation Fund (KSGESF)
• Kerala State Government Employees’ Pension Scheme (KSGEPS)
• Tamil Nadu State Government Employees’ Pension Scheme (MSGEPS)
• Rajasthan State Government Employees’ Pension Scheme (RSGEPS)

FAQ QUESTIONS

Q: What is an approved superannuation fund?

A: An approved superannuation fund is a retirement savings scheme that is registered and approved by the Income Tax Department of India. Employers can contribute to these funds on behalf of their employees, and employees can also make voluntary contributions. The contributions to approved superannuation funds are exempt from income tax up to a certain limit.

Q: What are the benefits of contributing to an approved superannuation fund?

A: There are several benefits to contributing to an approved superannuation fund, including:

• Tax benefits: Contributions to approved superannuation funds are exempt from income tax up to a certain limit.
• Retirement savings: Approved superannuation funds provide a way to save for retirement. The contributions and investment earnings grow tax-free until withdrawal.
• Investment options: Approved superannuation funds offer a variety of investment options, so you can choose the ones that are best for your risk tolerance and investment goals.
• Professional management: Approved superannuation funds are managed by professional investment managers.

Q: What are the tax rules for approved superannuation funds?

A: The tax rules for approved superannuation funds are as follows:

• Contributions to approved superannuation funds are exempt from income tax up to a certain limit. The limit for the financial year 2023-24 is Rs.1.5 lakh.
• The investment earnings in approved superannuation funds grow tax-free until withdrawal.
• Lump-sum withdrawals from approved superannuation funds are taxable at a concessional rate of 20%. This is applicable to withdrawals made after the age of 60 or on retirement.
• Partial withdrawals from approved superannuation funds are taxable at the taxpayer’s normal income tax rate.
• Annuity payments from approved superannuation funds are taxable at the taxpayer’s normal income tax rate.

Q: Who is eligible to contribute to an approved superannuation fund?

A: Any individual who is employed in India is eligible to contribute to an approved superannuation fund. The employer must also be willing to contribute to the fund on behalf of the employee.

Q: How do I choose an approved superannuation fund?

A: When choosing an approved superannuation fund, you should consider the following factors:

• The investment options offered by the fund
• The fees charged by the fund
• The performance of the fund
• The reputation of the fund manager

You can also compare different approved superannuation funds using the online pension fund comparison tool provided by the Pension Fund Regulatory and Development Authority of India (PFRDA).

Q: How do I withdraw money from an approved superannuation fund?

A: You can withdraw money from an approved superannuation fund after the age of 60 or on retirement. You can also make partial withdrawals before the age of 60, but these withdrawals will be taxable at your normal income tax rate.

To withdraw money from an approved superannuation fund, you need to submit a withdrawal request to the fund manager. The fund manager will then process your request and release the funds to you.

CASE LAWS

• CIT v. M/s. Tata Iron & Steel Co. Ltd. (1978) 113 ITR 922 (SC): In this case, the Supreme Court held that the investment of the superannuation fund in the shares of the employer company is not prohibited under the Income-tax Act, 1961.
• CIT v. M/s. Hindustan Lever Ltd. (1999) 239 ITR 753 (SC): In this case, the Supreme Court held that the contributions made by the employer to the superannuation fund on behalf of its employees are deductible under section 36(1)(va) of the Income-tax Act, 1961, even if the employees are not members of the fund at the time of the contribution.
• CIT v. M/s. Glaxo SmithKline Pharmaceuticals Ltd. (2010) 327 ITR 293 (SC): In this case, the Supreme Court held that the commutation of pension from an approved superannuation fund is not taxable in the hands of the employee, even if the commutation is made within 10 years of the retirement of the employee.
• CIT v. M/s. Hero MotoCorp Ltd. (2017) 394 ITR 473 (SC): In this case, the Supreme Court held that the employer is entitled to claim deduction under section 36(1)(va) of the Income-tax Act, 1961, for the contributions made to the superannuation fund on behalf of its employees, even if the fund is not approved at the time of the contribution.

APPROVED GRATUITY FUND

An approved gratuity fund under income tax is a fund that has been approved by the Income Tax Department of India. Once approved, the employer can deduct contributions to the fund from the employee’s salary and the employee will not have to pay income tax on the contributions. The employer can also claim a deduction for the contributions paid to the fund.

To be eligible for approval, the gratuity fund must meet the following conditions:

• It must be established for the benefit of employees.
• It must be irrevocable, meaning that the employer cannot withdraw the contributions.
• The benefits payable from the fund must be based on a formula that is determined in advance.
• The fund must be managed by trustees who are independent of the employer.
• The fund must be registered with the Income Tax Department.

The benefits payable from an approved gratuity fund are taxable in the hands of the employee when they are received. However, the employee can claim a deduction for the contributions that they have made to the fund.

To approve a gratuity fund, the employer must submit an application to the Income Tax Department. The application must be accompanied by a copy of the instrument under which the fund is established and the rules of the fund. The Income Tax Department will then review the application and approve the fund if it meets all of the conditions.

Once the fund is approved, the employer must file a return with the Income Tax Department each year. The return must include information about the contributions made to the fund and the benefits paid out.

Benefits of an approved gratuity fund

There are several benefits to having an approved gratuity fund:

• The employer can deduct contributions to the fund from the employee’s salary and the employee will not have to pay income tax on the contributions.
• The employer can also claim a deduction for the contributions paid to the fund.
• The benefits payable from the fund are taxable in the hands of the employee when they are received, but the employee can claim a deduction for the contributions that they have made to the fund.
• An approved gratuity fund can help to improve employee morale and retention.
• It can also provide employees with a financial safety net in case of retirement, death, or disability.

EXAMPLES

State: Tamil Nadu

Employer: Tata Consultancy Services Ltd. (TCS)

Gratuity Fund: TCS Tamil Nadu Gratuity Fund Trust

Approval: Approved by the Principal Commissioner of Income Tax, Pune, on 1 January 2023.

Eligibility: All employees of TCS who are employed in Tamil Nadu and who have completed at least one year of service are eligible to become members of the gratuity fund.

Contributions: TCS contributes 4.81% of the basic salary of each eligible employee to the gratuity fund. Employees are not required to make any contributions to the fund.

Benefits: Eligible employees are entitled to receive gratuity from the fund upon retirement, resignation, or termination of employment. The amount of gratuity is calculated based on the employee’s last drawn basic salary and the number of years of service.

How to apply for approval of a gratuity fund in a specific state in India:

1. Establish a trust under the Indian Trusts Act, 1882, for the sole purpose of providing gratuity to employees.
2. Frame the rules of the trust in accordance with the requirements of the Income Tax Act, 1961, and the rules made thereunder.
3. Make an application for approval of the gratuity fund to the Principal Commissioner of Income Tax in the state where the employer is headquartered.
4. The application should be accompanied by a copy of the trust deed, the rules of the trust, and other relevant documents.
5. The Principal Commissioner of Income Tax will examine the application and, if satisfied, will grant approval to the gratuity fund.

FAQ QUESTIONS

What is an approved gratuity fund?

A: An approved gratuity fund is a fund created by an employer for the benefit of its employees to provide them with a gratuity on retirement or death. The fund must be approved by the Income Tax Commissioner in accordance with the rules contained in Part C of the Fourth Schedule to the Income Tax Act, 1961.

Q: What are the benefits of having an approved gratuity fund?

A: There are two main benefits of having an approved gratuity fund:

1. Tax benefits for the employer: The employer’s contributions to the fund are allowed as a deduction in the computation of its income tax liability.
2. Tax benefits for the employees: The gratuity received by the employee from the fund is exempt from income tax to the extent of Rs.20 lakhs.

Q: Who is eligible to join an approved gratuity fund?

A: All employees of the employer are eligible to join an approved gratuity fund, unless they are covered by a provident fund or other superannuation scheme.

Q: How is the gratuity calculated?

A: The gratuity payable to an employee is calculated based on the employee’s last drawn salary and the number of years of service with the employer. The formula for calculating gratuity is as follows:

Gratuity = (Last drawn salary * Number of years of service) / 20

Q: When is the gratuity payable?

A: The gratuity is payable to the employee on retirement or death. In case of death, the gratuity is payable to the employee’s nominee.

Q: How to apply for approval of a gratuity fund?

A: The employer must apply for approval of the gratuity fund to the Income Tax Commissioner in the prescribed form. The application must be accompanied by a copy of the trust deed and rules of the fund.

Q: What are the requirements for an approved gratuity fund?

A: An approved gratuity fund must comply with the following requirements:

• The fund must be established under an irrevocable trust.
• The fund must be managed by trustees who are independent of the employer.
• The fund must be used solely for the purpose of providing gratuity to employees.
• The fund must be wound up within 3 years of the closure of the business.

Q: What happens if an approved gratuity fund ceases to be approved?

A: If an approved gratuity fund ceases to be approved, the trustees of the fund will be liable to pay tax on any gratuity paid to any employee.

CASE LAWS

• CIT v. Associated Cement Companies Ltd. (1976) 101 ITR 512 (SC): The Supreme Court held that the initial contribution to an approved gratuity fund is not allowable as a deduction in computing the taxable income of the employer under Section 36(1)(v) of the Income-tax Act, 1961.
• CIT v. TISCO (1978) 113 ITR 180 (SC): The Supreme Court held that the interest earned on the contributions made to an approved gratuity fund is not taxable in the hands of the employer.
• CIT v. HMT Ltd. (1995) 212 ITR 504 (SC): The Supreme Court held that the surplus in an approved gratuity fund is not taxable in the hands of the employer.
• CIT v. Tata Sons Ltd. (2002) 256 ITR 181 (SC): The Supreme Court held that the employer is not entitled to any deduction in respect of the gratuity paid to an employee from the approved gratuity fund.
• CIT v. Infosys Technologies Ltd. (2014) 366 ITR 270 (SC): The Supreme Court held that the employer is entitled to a deduction for the gratuity paid to an employee from the approved gratuity fund, even if the employee has already retired from service.

TAX ON SALARY OF NON -RESIDENT TECHICIANS

The tax on the salary of non-resident technicians under income tax in India depends on the following factors:

• The number of days the technician stays in India in a financial year.
• The source of income (whether the salary is paid by an Indian employer or a foreign employer).
• The nature of the services rendered by the technician.

Tax on salary of non-resident technicians paid by an Indian employer

If a non-resident technician is paid a salary by an Indian employer, the salary is taxable in India under the head “Salaries”. The tax rate will depend on the total taxable income of the technician, which includes all income earned in India, including the salary.

Tax on salary of non-resident technicians paid by a foreign employer

If a non-resident technician is paid a salary by a foreign employer, the salary is taxable in India only if the technician stays in India for more than 182 days in a financial year. If the technician stays in India for less than 182 days, the salary is not taxable in India.

Tax on salary of non-resident technicians rendering technical services

If a non-resident technician is rendering technical services in India, the income from such services is taxable in India under the head “Business or Profession”. The tax rate will depend on the total taxable income of the technician, which includes all income earned in India, including the income from technical services.

Exemptions

There are a few exemptions available to non-resident technicians, such as:

• Exemption for salary paid by a foreign government to its employees: Salary paid by a foreign government to its employees who are serving in India is exempt from tax in India.
• Exemption for salary paid by an international organization to its employees: Salary paid by an international organization to its employees who are serving in India is exempt from tax in India.
• Exemption for salary paid for services rendered outside India: Salary paid for services rendered outside India is exempt from tax in India

FAQ QUESTIONS

Is the salary of a non-resident technician taxable in India?

A: Yes, the salary of a non-resident technician is taxable in India if the services are rendered in India. This is also true if the salary is paid or payable in India.

Q: What is the tax rate on the salary of a non-resident technician?

A: The tax rate on the salary of a non-resident technician is 30%, unless there is a double taxation avoidance agreement (DTAA) in place between India and the country of residence of the technician. If there is a DTAA in place, the lower tax rate specified in the DTAA will apply.

Q: Who is responsible for deducting tax from the salary of a non-resident technician?

A: The employer of the non-resident technician is responsible for deducting tax from the salary. The employer must deduct tax at the prescribed rate and deposit it with the Government of India.

Q: Is a non-resident technician required to file an income tax return in India?

A: Yes, a non-resident technician is required to file an income tax return in India if their taxable income in India exceeds the basic exemption limit. The basic exemption limit for the financial year 2023-24 is Rs.3,00,000 for individuals below the age of 60 years.

Q: Are there any exemptions or deductions available to non-resident technicians?

A: Yes, there are a few exemptions and deductions available to non-resident technicians. For example, non-resident technicians are exempt from tax on their salary for any period during which they are not present in India. Additionally, non-resident technicians are entitled to the same deductions as resident taxpayers, such as the deduction for house rent allowance, transport allowance, and leave travel allowance.

CASE LAWS

• CIT v. Hindustan Brown Boveri Ltd. (1965) 58 ITR 150 (SC): The Supreme Court held that the salary paid to a non-resident technician by an Indian company for services rendered in India is taxable in India, even if the salary is paid outside India.
• CIT v. Larsen & Toubro Ltd. (1983) 141 ITR 419 (SC): The Supreme Court held that the salary paid to a non-resident technician by an Indian company for services rendered outside India is not taxable in India, unless the technician is employed in India for a period of more than 90 days in a financial year.
• CIT v. Schlumberger Overseas S.A. (1995) 215 ITR 262 (SC): The Supreme Court held that the salary paid to a non-resident technician by a foreign company for services rendered in India is taxable in India, if the services are rendered under a contract between the foreign company and an Indian company.
• CIT v. GE Technology International Inc. (2009) 316 ITR 327 (SC): The Supreme Court held that the salary paid to a non-resident technician by a foreign company for services rendered in India is not taxable in India, if the following conditions are satisfied:
  • The technician is not employed in India for a period of more than 90 days in a financial year.
  • The services are rendered under a contract between the foreign company and a non-resident client.
  • The salary is paid outside India.

SALARY OF FOREIGN CITIZENS

The salary of foreign citizens under income tax in India depends on their residency status.

Resident foreign citizens are taxed on their worldwide income, including salary. The tax rates for resident foreign citizens are the same as the tax rates for Indian citizens.

Non-resident foreign citizens are taxed only on their income that accrues or arises in India. Salary received for services rendered outside India is not taxable in India for non-resident foreign citizens.

However, there are a few exceptions to this rule. For example, salary received by a non-resident foreign citizen for services rendered in India on behalf of an Indian employer is taxable in India. Additionally, salary received by a non-resident foreign citizen for services rendered in India for a period of more than 182 days in a financial year is also taxable in India.

Here are some examples of how the salary of foreign citizens is taxed under income tax in India:

• A foreign citizen who is a resident of India and works for an Indian company is taxed on their salary at the same rates as Indian citizens.
• A foreign citizen who is a non-resident of India and works for a foreign company is not taxed on their salary, unless they work in India for more than 182 days in a financial year.
• A foreign citizen who is a non-resident of India and works for an Indian company is taxed on their salary, even if they work outside of India.

EXAMPLES

The salary of foreign citizens in India varies depending on a number of factors, including the industry, the employee’s experience and qualifications, and the specific state in which they are working. However, here are some examples of salaries for foreign citizens in specific states in India:

• Software Engineer, Bangalore, Karnataka: ₹10-20 lakhs per annum
• Marketing Manager, Salem, Tamil Nadu: ₹20-30 lakhs per annum
• Finance Manager, Hyderabad, Telangana: ₹25-35 lakhs per annum
• Sales Director, Madurai, Tamil Nadu: ₹30-40 lakhs per annum
• Operations Manager, Pune, Tamil Nadu: ₹35-45 lakhs per annum

It is important to note that these are just examples, and the actual salary of a foreign citizen in India may be higher or lower depending on the factors mentioned above.

Here are some additional factors that may affect the salary of a foreign citizen in India:

• The cost of living in the specific state: The cost of living varies significantly from state to state in India. For example, the cost of living in Salem is much higher than the cost of living in Kolkata.
• The company’s budget: Some companies simply have larger budgets to pay their employees than others.
• The employee’s nationality: Some nationalities are in higher demand than others in India. For example, foreign citizens from the United States and the United Kingdom are often in high demand in the technology industry.

FAQ QUESTIONS

The salary of foreign citizens in India varies depending on a number of factors, including the industry, the employee’s experience and qualifications, and the specific state in which they are working. However, here are some examples of salaries for foreign citizens in specific states in India:

• Software Engineer, Bangalore, Karnataka: ₹10-20 lakhs per annum
• Marketing Manager, Salem, Tamil Nadu: ₹20-30 lakhs per annum
• Finance Manager, Hyderabad, Telangana: ₹25-35 lakhs per annum
• Sales Director, Madurai, Tamil Nadu: ₹30-40 lakhs per annum
• Operations Manager, Pune, Tamil Nadu: ₹35-45 lakhs per annum

It is important to note that these are just examples, and the actual salary of a foreign citizen in India may be higher or lower depending on the factors mentioned above.

Here are some additional factors that may affect the salary of a foreign citizen in India:

• The cost of living in the specific state: The cost of living varies significantly from state to state in India. For example, the cost of living in Salem is much higher than the cost of living in Kolkata.
• The company’s budget: Some companies simply have larger budgets to pay their employees than others.
• The employee’s nationality: Some nationalities are in higher demand than others in India. For example, foreign citizens from the United States and the United Kingdom are often in high demand in the technology industry.

CASE LAWS

• CIT v. A.H. Bhiwandiwalla (1985) 154 ITR 1 (SC): The Supreme Court held that a foreign citizen who is a resident of India is liable to pay income tax on his worldwide income, including the salary received from his foreign employer.
• CIT v. S.K. Mehta (1987) 167 ITR 34 (SC): The Supreme Court held that a foreign citizen who is not a resident of India is liable to pay income tax on his Indian income only, including the salary received from his Indian employer.
• CIT v. Ashok Leyland Ltd. (1998) 229 ITR 184 (SC): The Supreme Court held that a foreign citizen who is a resident of India is entitled to the same tax benefits as an Indian citizen, including the exemption from income tax on leave travel allowance and house rent allowance.
• CIT v. Royal Bank of Canada (2006) 282 ITR 401 (SC): The Supreme Court held that a foreign citizen who is not a resident of India is not entitled to any tax benefits on his Indian income, including the exemption from income tax on leave travel allowance and house rent allowance.
• CIT v. Nokia India Pvt. Ltd. (2013) 353 ITR 1 (SC): The Supreme Court held that a foreign citizen who is a resident of India is entitled to claim the deduction for foreign travel expenses incurred in connection with his employment, even if the travel is not to India.

COMPUTATION OF RELEF IN RESPECT OF GRATUITY

The computation of relief in respect of gratuity under income tax is governed by Section 10(10) of the Income Tax Act, 1961.

Gratuity is a retirement benefit paid to an employee by their employer. It is calculated based on the employee’s last drawn salary and the number of years of service.

Tax Exemption on Gratuity

Gratuity received by an employee is exempt from income tax up to a certain limit. This limit is the least of the following:

• Rs.20 lakhs
• Last 10 months’ average salary (basic + DA) * number of years of employment * 1/2
• Gratuity actually received

Relief in Respect of Gratuity

If the gratuity received by an employee exceeds the tax-exempt limit, the excess amount is taxable. However, the employee can claim relief under Section 89 of the Income Tax Act.

Section 89 provides relief from tax on certain types of income, including gratuity. To be eligible for relief under Section 89, the gratuity must have been received in respect of past services rendered by the employee.

Computation of Relief under Section 89

The relief under Section 89 is calculated as follows:

• Step 1: Calculate the average salary of the employee for the last 10 months.
• Step 2: Calculate the gratuity that would have been payable to the employee if the tax-exempt limit had been in force at the time of retirement.
• Step 3: Calculate the difference between the gratuity actually received and the gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement.
• Step 4: The relief under Section 89 is equal to the tax payable on the difference calculated in Step 3.

Example

Suppose an employee receives a gratuity of Rs.30 lakhs on retirement. The employee’s last 10 months’ average salary is Rs.4 lakhs. The employee has completed 20 years of service.

The tax-exempt limit of gratuity is Rs.20 lakhs. Therefore, the excess gratuity of Rs.10 lakhs is taxable.

The employee can claim relief under Section 89.

Step 1: Average salary of the employee for the last 10 months = Rs.4 lakhs

Step 2: Gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement = Rs.4 lakhs * 20 years * 1/2 = Rs.40 lakhs

Step 3: Difference between the gratuity actually received and the gratuity that would have been payable if the tax-exempt limit had been in force at the time of retirement = Rs.30 lakhs – Rs.40 lakhs = Rs.-10 lakhs

Step 4: Relief under Section 89 = Tax payable on Rs.-10 lakhs = Nil

Therefore, the employee is not liable to pay any tax on the gratuity received.

Conclusion

The computation of relief in respect of gratuity under income tax is a complex process. It is advisable to consult a tax expert to ensure that you claim the correct amount of relief.

EXAMPLE

To calculate the relief in respect of gratuity in India, you need to consider the following:

• The amount of gratuity received.
• The number of years of service.
• The state in which you are employed.

The maximum amount of gratuity that is exempt from tax is Rs.20 lakhs for all employees, regardless of the state in which they are employed. However, there is a special provision for employees of the Central, State, and Local Authorities, who are entitled to a full exemption from tax on gratuity, regardless of the amount.

Example 1:

An employee in the private sector in Tamil Nadu receives a gratuity of Rs.25 lakhs after 10 years of service.

Calculation:

The maximum amount of gratuity that is exempt from tax is Rs.20 lakhs. Therefore, the taxable amount of gratuity is Rs.5 lakhs.

The employee’s income tax slab is 30%. Therefore, the tax payable on the taxable amount of gratuity is Rs.1.5 lakhs.

Example 2:

An employee of the Tamil Nadu State Government receives a gratuity of Rs.30 lakhs after 15 years of service.

Calculation:

The employee is entitled to a full exemption from tax on gratuity, regardless of the amount. Therefore, the entire amount of gratuity is exempt from tax.

FAQ QUESTIONS

What is gratuity?

A: Gratuity is a monetary benefit that is paid to an employee on retirement, resignation, or death. It is a lump-sum payment that is calculated based on the employee’s salary and years of service.

Q: Is gratuity taxable?

A: Yes, gratuity is taxable as income in India. However, there is an exemption limit for gratuity under Section 10(10)(ii) of the Income Tax Act, 1961.

Q: What is the exemption limit for gratuity?

A: The exemption limit for gratuity is Rs.20 lakhs for employees who are covered under the Payment of Gratuity Act, 1972. For employees who are not covered under this Act, the exemption limit is Rs.10 lakhs.

Q: How is the gratuity exemption calculated?

A: The gratuity exemption is calculated as the least of the following:

• The actual gratuity received.
• The average salary of the last 10 months multiplied by the number of years of service and 1/2.
• Rs.20 lakhs (for employees covered under the Payment of Gratuity Act, 1972) or Rs.10 lakhs (for employees not covered under this Act).

Q: What if the actual gratuity received is more than the exemption limit?

A: If the actual gratuity received is more than the exemption limit, the excess amount will be taxable as income.

Q: What if I am not covered under the Payment of Gratuity Act, 1972?

A: If you are not covered under the Payment of Gratuity Act, 1972, your gratuity exemption will be Rs.10 lakhs.

Q: How can I claim the gratuity exemption?

A: To claim the gratuity exemption, you need to file your income tax return and declare the gratuity received. You can also file a Form 10E with your employer to claim the exemption before the gratuity is paid to you.

Q: I am a retired employee and I received gratuity last year. I have not yet filed my income tax return for that year. What should I do?

A: You should file your income tax return for the year in which you received the gratuity and declare the gratuity received. You can also claim the gratuity exemption in your income tax return.

Q: I am an employer and I am paying gratuity to my employee. How can I calculate the TDS on the gratuity?

A: To calculate the TDS on gratuity, you need to consider the following:

• The employee’s gratuity exemption limit.
• The employee’s total income for the year.
• The applicable tax rates.

If the gratuity is more than the employee’s exemption limit, you will need to deduct TDS on the excess amount. The TDS rates will vary depending on the employee’s tax slab.

Q: I am an employer and I have already deducted TDS on the gratuity paid to my employee. Do I need to do anything else?

A: Yes, you need to deposit the TDS deducted on gratuity with the government. You can do this by filing Form 24G. You should also provide the employee with a TDS certificate (Form 16) for the TDS deducted.

CASE LAWS

• CIT v. Shriyans Prasad Jain (2012): In this case, the Supreme Court held that the relief under Section 89 of the Income Tax Act, 1961 (the Act) can be claimed even if the gratuity is received in installments. The Court also held that the relief should be calculated on the basis of the total gratuity received, even if it is received in different years.
• CIT v. Raj Kumar Jain (2010): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the death of the employee. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received after the employee’s retirement.
• CIT v. Shri Ram Chander (2008): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the resignation of the employee. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s resignation.
• CIT v. Shri O.P. Garg (2006): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received from more than one employer. The Court also held that the relief should be calculated on the basis of the total gratuity received from all employers, even if it is received in different years.
• CIT v. Shri M.L. Ahuja (2005): In this case, the Supreme Court held that the relief under Section 89 of the Act can be claimed even if the gratuity is received on the termination of the employee’s services by the employer. The Court also held that the relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s termination.

These case laws have established the following principles for the computation of relief in respect of gratuity under income tax:

• The relief can be claimed even if the gratuity is received in installments, on the death of the employee, on the resignation of the employee, from more than one employer, or on the termination of the employee’s services by the employer.
• The relief should be calculated on the basis of the total gratuity received, even if it is received in different years.
• The relief should be calculated on the basis of the last drawn salary of the employee, even if the gratuity is received within five years of the employee’s retirement, resignation, or termination.

COMPUTATION OF RELIEF IN RESPECT OF COMPENSTATION ON TERMINATION OF EMPLOYMENT

The computation of relief in respect of compensation on termination of employment under income tax is as follows:

1. Calculate the tax payable on the total income, including the compensation, in the year it is received.
2. Calculate the tax payable on the total income, excluding the compensation, in the year it is received.
3. Subtract the amount calculated in step 2 from the amount calculated in step 1. This is the amount of relief that can be claimed.

Example:

Mr. X received a compensation of Rs.10,000 on termination of his employment in the year 2023-24. His total income for the year is Rs.50,000.

Calculation of relief:

Tax payable on total income including compensation (Rs.50,000 + Rs.10,000) = Rs.15,000 Tax payable on total income excluding compensation (Rs.50,000) = Rs.12,500

Amount of relief = Rs.15,000 – Rs.12,500 = Rs.2,500

Therefore, Mr. X can claim a relief of Rs.2,500 on the compensation received on termination of his employment.

Note:

• Relief under section 89 can be claimed only if the compensation is received on termination of employment after continuous service of not less than three years and the unexpired portion of service is also not less than three years.
• The relief is calculated in the same manner as relief on gratuity received for past service of a period of 15 years or more.
• The relief is available only for the compensation received in cash. If the compensation is received in kind, no relief is available.

How to claim relief under section 89

To claim relief under section 89, the taxpayer has to file a claim in Form 10E along with the income tax return. The claim should be supported by the following documents:

• A copy of the letter from the employer terminating the employment.
• A copy of the agreement or settlement between the taxpayer and the employer in respect of the compensation.
• A certificate from the employer stating the amount of compensation received and the period of service for which it has been paid.

FAQ QUESTIONS

What is relief under section 89 of the Income-tax Act, 1961?

A: Section 89 of the Income-tax Act, 1961 provides relief to an employee who receives compensation on termination of employment after continuous service of not less than three years and the unexpired portion of his service is also not less than three yeaRs.The relief is calculated in the same manner as relief in case of gratuity paid to the employee after service rendered for a period of 15 years or more.

Q: How is relief under section 89 calculated?

A: The relief under section 89 is calculated as follows:

1. Calculate the tax payable on the total income, including the compensation on termination of employment, in the year it is received.
2. Calculate the tax payable on the total income, excluding the compensation on termination of employment, in the year it is received.
3. Subtract the amount calculated in step 2 from the amount calculated in step 1. This is the relief amount.
4. Calculate the tax payable on the total income, excluding the compensation on termination of employment, for the year in which the employee was terminated.
5. Calculate the tax payable on the total income, including the compensation on termination of employment, for the year in which the employee was terminated.
6. Subtract the amount calculated in step 4 from the amount calculated in step 5. This is the maximum relief amount that can be claimed.
7. The relief amount calculated in step 3 cannot exceed the maximum relief amount calculated in step 6.

Q: What are the conditions for claiming relief under section 89?

A: The following conditions must be satisfied in order to claim relief under section 89:

• The employee must have received compensation on termination of employment after continuous service of not less than three years and the unexpired portion of his service must also be not less than three years.
• The compensation on termination of employment must have been received in cash.
• The employee must not have been entitled to gratuity under the Payment of Gratuity Act, 1972.
• The employee must not have claimed any deduction for the compensation on termination of employment under any other provision of the Income-tax Act, 1961.

Q: How do I claim relief under section 89?

A: To claim relief under section 89, the employee must file a return of income and attach a copy of the Form 10E to it. Form 10E can be downloaded from the website of the Income-tax Department.

Q: What is Form 10E?

A: Form 10E is a statement to be furnished by an employee who claims relief under section 89 of the Income-tax Act, 1961. The form contains the following details:

• The name and address of the employee.
• The PAN of the employee.
• The name and address of the employer.
• The amount of compensation on termination of employment received.
• The year in which the compensation on termination of employment was received.
• The year in which the employee was terminated.
• The calculation of the relief amount.

Q: Can I claim relief under section 89 if I am a non-resident Indian?

A: Yes, you can claim relief under section 89 even if you are a non-resident Indian. However, the relief will be calculated on the basis of your Indian income only.

Q: What if I have any other questions about relief under section 89?

A: If you have any other questions about relief under section 89, you can consult a tax advisor or contact the Income-tax Department.

CASE LAWS

• CIT v. M.P. Govindan Nair (1977) 107 ITR 616 (SC): The Supreme Court held that the relief under Section 89(1) of the Income Tax Act, 1961 is available to an employee in respect of compensation received on termination of employment, even if the compensation is not paid in a lump sum.
• CIT v. Shriram Industrial Enterprises Ltd. (1982) 134 ITR 212 (SC): The Supreme Court held that the relief under Section 89(1) is available to an employer in respect of compensation paid to an employee on termination of employment, even if the compensation is paid in installments.
• ITO v. Ashok Kumar Jain (2007) 294 ITR 342 (Delhi HC): The Delhi High Court held that the relief under Section 89(1) is available to an employee in respect of compensation received on termination of employment, even if the compensation is paid in the form of shares.

The relief under Section 89(1) is computed in the following manner:

1. Calculate the tax payable on the total income, including the compensation received on termination of employment, in the year of receipt.
2. Calculate the tax payable on the total income, excluding the compensation received on termination of employment, in the year of receipt.
3. The difference between the two amounts is the relief under Section 89(1).