Section 10(10) of the Income Tax Act, 1961 provides for exemption of certain types of income received by an individual. This section is important for taxpayers as it helps them to reduce their tax liability.
Under Section 10(10), the following types of income are exempt from tax:
- Gratuity: Gratuity is a payment made by an employer to an employee as a token of appreciation for the services rendered by the employee. Gratuity received by an employee is exempt from tax subject to certain conditions. The exemption limit for gratuity is Rs. 20 lakhs. Any amount received above this limit will be taxable as per the individual’s tax slab.
- Commutation of pension: Commutation of pension refers to the lump-sum payment made to an employee in lieu of the pension. The amount of commutation received is exempt from tax up to one-third of the total pension received.
- Leave encashment: Leave encashment is a payment made to an employee in lieu of the leave period not availed. The amount received as leave encashment is exempt from tax up to a certain limit. The exemption limit for leave encashment is the least of the following:a) The actual amount received as leave encashment b) 10 months’ average salary c) The amount prescribed by the government (currently, it is Rs. 3 lakhs)
- Retrenchment compensation: Retrenchment compensation is a payment made by an employer to an employee in case of termination of employment due to redundancy. The amount of retrenchment compensation received is exempt from tax up to Rs. 5 lakhs.
- VRS compensation: VRS compensation is a payment made to an employee who opts for voluntary retirement. The amount of VRS compensation received is exempt from tax up to Rs. 5 lakhs.
It is important to note that the exemptions under Section 10(10) are subject to certain conditions and limits. Therefore, it is advisable to consult a tax professional or refer to the Income Tax Act for a better understanding of the provisions.
- Gratuity:
Gratuity is a statutory benefit provided to employees who have completed a minimum of 5 years of continuous service with an employer. The amount of gratuity paid to an employee is calculated based on the number of years of service and the last drawn salary.
To qualify for the exemption under Section 10(10), the gratuity must be received by an employee on his retirement, superannuation, resignation, or death. The exemption is also available to employees who have become incapacitated or disabled due to a disease or accident.
- Commutation of pension:
Pension commutation refers to the lump-sum payment made to an employee in lieu of a portion of his pension. The amount of commutation received is exempt from tax up to one-third of the total pension received.
For example, if an employee is entitled to a monthly pension of Rs. 30,000 and chooses to commute one-third of the pension, he will receive a lump-sum amount of Rs. 10,000 per month (i.e., one-third of the monthly pension). The exempted amount under Section 10(10) will be Rs. 3,33,333 (i.e., one-third of the commuted amount of Rs. 10,000 x 12 months x 25 years of service).
- Leave encashment:
Leave encashment is a benefit provided to employees who have accumulated leave but are unable to avail of it due to work exigencies or other reasons. The amount of leave encashment received is exempt from tax up to a certain limit.
To qualify for the exemption under Section 10(10), the employee must have accumulated leave during the period of his employment. The exemption is available only on the actual amount of leave encashment received, subject to the limits prescribed by the government.
- Retrenchment compensation:
Retrenchment compensation is a payment made to employees who are laid off due to redundancy or closure of the company. The amount of retrenchment compensation received is exempt from tax up to Rs. 5 lakhs.
To qualify for the exemption under Section 10(10), the employee must have worked for a minimum period of one year with the employer. The exemption is available only to employees who are laid off due to redundancy and not due to misconduct or violation of company policies.
- VRS compensation:
Voluntary Retirement Scheme (VRS) is a scheme offered by employers to their employees who wish to retire voluntarily. The amount of VRS compensation received is exempt from tax up to Rs. 5 lakhs.
To qualify for the exemption under Section 10(10), the employee must have completed a minimum of 10 years of service with the employer. The exemption is available only to employees who retire voluntarily and not due to any other reason.
In conclusion, Section 10(10) of the Income Tax Act provides exemptions for various types of income received by an individual, which can help in reducing the tax liability. However, taxpayers must ensure that they meet the eligibility criteria and comply with the conditions specified under this section to avail of the benefits provided by the Act.
Read more useful content:
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Frequently Asked Questions (FAQs)
Q. What is Section 10(10) of the Income Tax Act?
Section 10(10) of the Income Tax Act provides for exemptions of certain types of income received by an individual, such as gratuity, commutation of pension, leave encashment, retrenchment compensation, and VRS compensation.
Q. Who is eligible for the exemption under Section 10(10)?
The exemption under Section 10(10) is available to individual taxpayers who receive the specified types of income, subject to certain conditions and limits.
Q. What is the exemption limit for gratuity under Section 10(10)?
The exemption limit for gratuity under Section 10(10) is Rs. 20 lakhs. Any amount received above this limit will be taxable as per the individual’s tax slab.
Q. What is the exemption limit for leave encashment under Section 10(10)?
The exemption limit for leave encashment under Section 10(10) is the least of the following:
What is the exemption limit for retrenchment compensation and VRS compensation under Section 10(10)?
The exemption limit for both retrenchment compensation and VRS compensation under Section 10(10) is Rs. 5 lakhs.
Q. What are the conditions for availing the exemption under Section 10(10)?
The conditions for availing the exemption under Section 10(10) vary depending on the type of income received. For example, to qualify for the exemption on gratuity, the employee must have completed a minimum of 5 years of continuous service, while for VRS compensation, the employee must have completed a minimum of 10 years of service.
Q. How can taxpayers claim the exemption under Section 10(10)?
Taxpayers can claim the exemption under Section 10(10) while filing their income tax returns. They must provide the necessary details and documents to support their claim for exemption.
Q. Is the exemption under Section 10(10) available to all taxpayers?
The exemption under Section 10(10) is available only to individual taxpayers and not to other entities such as companies, firms, or HUFs.
