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Sunday, June 03, 2001













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Is gratuity taxable?

T. Banusekar

I RESIGNED from an organisation in the financial year 2000-01 and received a gratuity of Rs 1.04 lakh. My former employer has deducted tax at source on the gratuity. I served the organisation for seven years. I would like to know whether the same is taxable.

Lalit Chopra

Reply

It appears that the reader is not a government employee. In other cases, gratuity is exempt on the following basis:

Any gratuity received under the Payment of Gratuity Act is exempt to the extent of the least of the following

*Rs 3,50,000

*15/26 x last drawn salary for every completed year of service or part of the year in excess of six months, or

*Gratuity actually received

Salary for this purpose means basic salary and dearness allowance.

Any other gratuity received by employee/legal heirs on retirement, termination of services, death, etc., is exempt to the extent of the least of the following:

*Rs 3,50,000

*Half month's salary (on the basis of last 10 months average) for each completed year of service (fraction to be ignored)

*Actual gratuity received

Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment, and commission as a percentage of turnover achieved by the employee.

Where a person is covered by the Payment of Gratuity Act, the exemption is available only if he has rendered a continuous service for a period of five years, except where the cessation of employment is due to death or disablement of the employee.

This exemption is available u/s.10(10) of the Income-Tax Act. One doubt that may arise is whether the exemption is available even in the case of resignation. The CBDT, in its Letter: F.No.194/6/73-IT(A-I) dated 19.06.1973, has clarified that the term termination of employment also includes a case where the service comes to an end due to resignation. This view has also found support in CIT v Savitaben N. Amin Smt. (1986) 157 ITR 135 (Guj).

Query

I am a chartered accountant employed in London since 20.02.2001. The gross salary for the previous year 2000-01 received in London was 12,085. The net salary is 7,509. My income-tax refund due is 2,749, which is yet to be received. The salary received by me in India up to 20.02.2001 is less than Rs 5 lakh. I would like to know:

*Whether deduction u/s.80RRA is available on the gross income or on the net income,

*Since the deduction u/s.80RRA is available, if a remittance is made within six months of the end of the previous year, will a remittance made in or after March, 2001 but before October 2001 from the salary received in the previous year 2001-02 entail me to the benefit u/s.80RRA?

*As my salary in India for the previous year 2000-01 is less than Rs 5 lakh, will I be entitled to standard deduction u/s.16(i) in respect of Indian salary?

Shobit Gupta

Reply

From the query it appears that the reader has for the first time travelled outside India only for taking up this employment. Hence, for the previous year 2000-01, the reader's residential status would be resident and ordinarily resident.

Therefore, the reader's income earned from 20.02.2001 to 31.03.2001 would be taxable in India in accordance with the Income-Tax Act. This apart, the salary received by the reader in India of around Rs 5 lakh will also be taxable in India. The tax in India will be on the gross amount of income, earned in London, which as per the query is 12,085.

If this sum has suffered tax in the UK it may be possible that the reader gets the benefit of article 24 of the Double Taxation Avoidance Agreement between India and the UK. Under Article 24, where the income becomes taxable both in India and in UK, India shall allow as a deduction from the tax on the income of that resident, a proportionate deduction computed in the following manner:

(Tax paid in the UK on doubly taxed income) x (Income doubly taxed/Entire income chargeable in India)

As regards the deduction available under Section 80RRA, a deduction can be claimed for the assessment year 2001-02 to the extent of the lower of

(a) amount brought into India in convertible foreign exchange before the expiry of six months from the end of the previous year, or such extended time as may be allowed by the Reserve Bank of India, or

(b) 60 per cent of the gross amount of income received for services rendered outside India.

From the assessment year 2002-03 onwards, the said 60 per cent would be reduced by 15 per cent every year in such a manner that no deduction would be available from assessment year 2005-06 onwards.

This will be available subject to the following conditions:

*the individual is a citizen of India earning remuneration in foreign currency

*such remuneration is paid by a foreign employer or an Indian concern for services rendered outside India

*a certificate in Form 10H is furnished along with the return of income

*the individual is a technician and the terms and conditions are approved by the Central Government or the Foreign Tax Division in the Department of Revenue in the Ministry of Finance

A technician for this purpose means a person having specialised knowledge and experience in:

(i) construction or manufacturing operations or mining or the generation or distribution of electricity or any other form of power; or

(ii) agriculture, animal husbandry, dairy farming, deep sea fishing or ship building; or

(iii) public administration or industrial or business management; or

(iv) accountancy; or

(v) any field of natural or applied science (including medical science) or social science; or

(vi) any other field which the Board may prescribe in this behalf,

who is employed in a capacity in which such specialised knowledge and experience are actually utilised

The Board has for the purpose of item (vi) above prescribed the following fields

(a) Banking

(b) Insurance

(c) Journalism

(d) Profession of actuaries

In this connection it may be noted that the application is to be made in Form No.ITNS-186. This approval may be granted for one year or for more years, depending on the nature of agreement between the employer and employee.

One can remit the money within six months from 31.03.2001, that is, before 30.09.2001, and this money can be out the salary received subsequent to the year ended 31.03.2001.

The salary received in London will also from part of income chargeable under the head `Salaries'. In the instant case, since the reader's salary income exceeds Rs 5 lakh, (including the salary received in London) standard deduction under Section 16(i) cannot be claimed.

Query

I recently retired from the services of a public limited company on superannuation. The company has a post-retirement medical scheme for its employees and spouses. Under the scheme, the company reimburses medical expenses against prescriptions and receipts. The company collects annual subscription from their ex-employees for this purpose. I wish to know whether

(a) the reimbursement so made is exempt

(b) if the answer to the above is in the negative, can the subscription paid be claimed as a deduction?

Brij Mohan Lal, New Delhi

Reply

From the facts, it is not clear as to whether this post-retirement medical scheme is being managed by the reader's former employer by collecting subscription and using such subscription to reimburse expenses on medical treatment. If this were so, the fund that is being used would be a mutual association and, hence, any sum received from such mutual association is not taxable.

In this context, one may refer to the following decisions which held that, based on the principle of mutuality, such receipts would not be taxable.

1. Styles v New York Life Insurance Company (1889) 2 TC 460.

2. Dublin Corporation v M'Adam (Ireland) (1887) 2 TC 387.

3. CIT v Royal Western India Turf Club (1953) 24 ITR 551(SC).

4. CIT v Kumbakonam Mutual Fund Ltd. (1964) 53 ITR 241 (SC).

5. CIT v Bankipur Club (1997) 226 ITR 97 (SC)

However, if the employer pays the same out of his own funds as a benefit to an ex-employee, the same should be taxable under the head salaries. Under this head, a reimbursement by an employer of medical expenses would not be treated as perquisite under Section 17(2) up to a sum of Rs 15,000, beyond which it would be taxable.

Tax Check

CORPORATE assessees are required to pay their first instalment of advance tax on or before June 15.

*Annual return of Tax Deduction at Source (TDS) on various incomes must be filed before June 30. There is one exception.

*The exception is that requirement does not apply to TDS on salary income. Returns for salary income have to be filed by July 31 of each year.

(The author is a practising chartered accountant, Chennai.)

Business Line invites queries on personal taxation issues to this column. They will be answered in the first Sunday's issue of Business Line every month. Queries may be addressed to Tax Talk, Business Line, Kasturi Buildings, 859, Anna Salai, Chennai 600002, or by e-mail to vaidy@thehindu.co.in


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