Depart encashment acquired on retirement is exempt from tax. It’s eligible solely whether it is acquired on retirement from employment, and never if encashed in the course of the course of employment. Courts have held that such retirement needn’t essentially be on retirement at superannuation, however would additionally cowl circumstances of leaving an employment by resigning. For workers of the central or state governments, the complete depart encashment quantity acquired is exempt, with out limits or situations. Alternatively, for all different staff, there are numerous situations and limits which can be relevant to have the ability to declare exemption.
For non-government staff, one situation is that depart entitlement for computing such exemption can’t exceed 30 days for every year of service. In addition to, such depart encashment can’t exceed 10 months, and the exemption needs to be computed on the idea of the common wage drawn throughout the 10 months, instantly previous retirement. In addition to, there may be an general cap on the quantity of exemption, which is notified every now and then by the federal government.
Moreover, if depart encashment was claimed earlier on retirement from every other employer, solely the steadiness of the restrict could be eligible on retirement.
Not too long ago, a notification was issued, pursuant to the funds announcement by the finance minister, growing the exemption cap on depart encashment from ₹3 lakh to ₹25 lakh, efficient 1 April. At first look, this appears an amazing profit given to non-government staff. However, is it actually so?
The restrict of ₹3 lakh was mounted manner again in 2002, with impact from 1998. An necessary facet is that the legislation offers that the restrict needs to be mounted by the central authorities having regard to the restrict relevant to central authorities staff. The restrict of ₹3 lakh was subsequently primarily based on the very best month-to-month wage of a central authorities worker of ₹30,000 (drawn by the cupboard secretary) in 1998. Given the month-to-month wage of the cupboard secretary at ₹2,92,500 in 2021, the exemption out there to authorities staff from that 12 months has been ₹29.25 lakh. Subsequently, the restrict given to non-government staff continues to be decrease than what’s being loved by authorities staff.
That aside, this restrict was not enhanced every now and then as authorities salaries elevated, however solely after a interval of 25 years. Workers who retired throughout 1998 and March 2023 would have gotten exemption for a most of ₹3 lakh, versus authorities staff who would have gotten a a lot bigger exemption.
In addition to, this restrict was not voluntarily elevated by the federal government on account of its magnanimity or out of sympathy for non-government staff. The enhancement was necessitated on account of a writ petition filed by staff of public-sector banks and undertakings towards the federal government earlier than the Delhi Excessive Court docket in 2019, claiming standing of presidency staff, and searching for parity for depart encashment exemption with authorities staff. Whereas the Delhi Excessive Court docket rejected the competition that public sector financial institution staff had been authorities staff, in its interim order of November 2019, the court docket discovered benefit within the grievance that the restrict had not been elevated since 1998.
The court docket had noticed that over the many years, the pay-scales admissible to authorities servants, and even staff of the general public sector endeavor and nationalised banks, and all others, had been upwardly revised, maintaining in view the monetary development within the nation, in addition to on account of rising inflation, and that the final drawn salaries had elevated manifold for the reason that final notification. It had subsequently requested the federal government to file a counter-affidavit in that regard. This writ petition continues to be pending earlier than the excessive court docket. The motion of the federal government has come three years after the Delhi Excessive Court docket observations.
It’s unlucky that each tax exemption comes with so many strings connected, that it typically defeats the aim of giving the exemption. May the notification growing the restrict not have been issued each three or 5 years? May the federal government not have been extra magnanimous, provided that it was liable for not issuing any notification for 25 years? There are such a lot of provisions requiring notification every now and then, that one wonders whether or not the aim of all that is both to create extra jobs within the authorities to deal with such work, or to quietly scale back the worth of the profit being supplied by not issuing a notification.
Gautam Nayak is accomplice at CNK & Associates LLP.
Up to date: 05 Jun 2023, 11:17 PM IST