Taxation - DT Ch 03: Salaries - Test 4: answer key

Question 1 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Mr. Aayush Malhotra, aged 58 years, retired from Aryan Steels Ltd. on 31 December 2026 after completing 20 years and 7 months of continuous service. The company is covered under the Payment of Gratuity Act, 1972, and Aayush's employment is also covered by that Act. On retirement, he received gratuity of ₹16,80,000, credited to his bank account on 31 December 2026. He had not received any gratuity from any previous employer before this payment. His last drawn monthly basic salary was ₹72,000, and dearness allowance was ₹18,000 per month. The DA was paid under the terms of employment and was included in the employee's remuneration throughout the service period. The company also paid him a performance bonus of ₹1,20,000 during December 2026 and a sales incentive of ₹60,000 in the same month. Neither amount was included in the monthly basic salary or DA figures. His employment contract provides for gratuity calculated in accordance with the Payment of Gratuity Act, 1972. The payroll department proposes to calculate gratuity using only basic salary because the DA component is not separately described as retirement-benefit salary. Another executive proposes to count only 20 years of service because the remaining seven months form an incomplete year. A third executive suggests applying the half-month average salary method applicable to employees outside the Payment of Gratuity Act. Aayush seeks the correct deduction available against his gratuity receipt for tax year 2026-27. Assume that the applicable statutory ceiling is ₹20,00,000, that no earlier gratuity deduction has been claimed, and that no other retirement receipt affects this computation.

Aayush completed 20 years and 7 months of service before retirement. For gratuity computation under the Payment of Gratuity Act, 1972, how many years of service must be considered? Distinguish the rule applicable to a period exceeding six months from the rule applicable to an employee not covered under that Act.

1. 20 years
2. 21 years (correct answer)
3. 22 years
4. 20 years and 7 months

Answer: B — 21 years

Explanation. For an employee covered under the Payment of Gratuity Act, the service period includes completed years and any part exceeding six months. Aayush has completed 20 years and 7 months. Since the additional seven months exceed six months, they are counted as another year. Thus, 20 + 1 = 21 years are considered. This rounding convention differs from that applicable to employees outside the Act, for whom a fraction of a year is ignored.

Where it goes wrong. Ignoring the additional seven months or applying the completed-years-only convention applicable to employees not covered by the Payment of Gratuity Act.

Authority. Section 19(1), Table SI No. 5 of the Income-tax Act, 2025; Payment of Gratuity Act, 1972

Question 2 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Determine Aayush's last drawn monthly salary for the purpose of gratuity deduction under the Payment of Gratuity Act, 1972. His basic salary is ₹72,000 and DA is ₹18,000 per month. He also receives a December performance bonus of ₹1,20,000 and sales incentive of ₹60,000. Identify the components entering the statutory salary formula rather than considering every remuneration receipt.

1. ₹72,000
2. ₹90,000 plus monthly bonus
3. ₹1,50,000
4. ₹90,000 (correct answer)

Answer: D — ₹90,000

Explanation. For an employee covered under the Payment of Gratuity Act, salary for this purpose comprises last drawn basic salary and DA. Thus, ₹72,000 + ₹18,000 = ₹90,000 per month. The bonus and sales incentive are not added to this statutory salary figure. Unlike the non-covered employee formula, the covered employee calculation does not use average salary for the ten months preceding retirement. The applicable monthly salary is the last drawn salary.

Where it goes wrong. Excluding DA or including bonus and sales incentive in the last drawn salary.

Authority. Section 19(1), Table SI No. 5 of the Income-tax Act, 2025; Payment of Gratuity Act, 1972

Question 3 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Using Aayush's last drawn monthly salary and rounded service period, determine the gratuity amount eligible for deduction under the salary deduction provisions, before comparing it with the actual gratuity received and statutory monetary ceiling. Apply the 15/26 formula prescribed for employees covered under the Payment of Gratuity Act.

1. ₹10,38,462
2. ₹9,80,769
3. ₹10,90,385 (correct answer)
4. ₹11,20,000

Answer: C — ₹10,90,385

Explanation. The formula is 15/26 × last drawn monthly salary × eligible service years. Aayush's salary is ₹90,000 and his eligible service period is 21 years. Therefore, deduction calculated under the formula = 15/26 × ₹90,000 × 21 = ₹10,90,384.62, rounded to ₹10,90,385. This figure must subsequently be compared with actual gratuity of ₹16,80,000 and the statutory ceiling of ₹20,00,000.

Where it goes wrong. Using 20 years instead of 21 years or dividing the last drawn salary by 30 rather than applying the prescribed 26-day convention.

Authority. Section 19(1), Table SI No. 5 of the Income-tax Act, 2025

Question 4 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Aayush received gratuity of ₹16,80,000 on retirement. The statutory ceiling is ₹20,00,000, and the gratuity amount under the prescribed 15/26 formula is ₹10,90,385. Determine the deduction available and the amount of gratuity remaining chargeable under Salaries. Consider all three statutory limits rather than treating the monetary ceiling as the deduction itself.

1. Deduction ₹10,90,385; taxable ₹5,89,615 (correct answer)
2. Deduction ₹16,80,000; taxable Nil
3. Deduction ₹20,00,000; taxable Nil
4. Deduction ₹9,80,769; taxable ₹7,00,000

Answer: A — Deduction ₹10,90,385; taxable ₹5,89,615

Explanation. The deduction is the least of actual gratuity, statutory limit and the formula amount. These are ₹16,80,000, ₹20,00,000 and ₹10,90,385 respectively. Therefore, deduction is ₹10,90,385. The taxable balance is ₹16,80,000 − ₹10,90,385 = ₹5,89,615. The statutory ceiling is only one of three limits and does not independently determine the deductible amount.

Where it goes wrong. Allowing the entire gratuity merely because it is below ₹20,00,000 instead of applying the 15/26 formula.

Authority. Section 19(1), Table SI No. 5 of the Income-tax Act, 2025

Question 5 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Mr. Siddharth Mehra retired from Vikramaditya Tech Labs Pvt. Ltd. on 31 March 2027 after completing 17 years and 10 months of continuous service. The company is not covered under the Payment of Gratuity Act, 1972, and Siddharth is not covered by that legislation. On retirement, the company paid him gratuity of ₹16,50,000. He had not received any gratuity from another employer in an earlier tax year. For the ten months immediately preceding the month of retirement, his monthly basic salary remained ₹64,000. He received DA of ₹20,000 per month, of which 50% formed part of salary for retirement benefits under his employment contract. In addition, he received commission calculated at 1% of monthly sales turnover. The monthly turnover for each of these ten months was ₹8,00,000. His employer also paid a performance bonus of ₹30,000 in December 2026 and a city allowance of ₹5,000 per month. The HR department proposes to include the entire DA, bonus and city allowance while computing average salary for gratuity. The accounts manager believes that service of 17 years and 10 months should be taken as 18 years. Siddharth's financial adviser argues that only completed years should be considered because the company is outside the Payment of Gratuity Act. The company requests the computation of the deduction available against Siddharth's gratuity for tax year 2026-27. Assume the notified statutory ceiling is ₹20,00,000 and there are no other gratuity receipts or earlier deductions requiring adjustment. Apply the salary definition and service-period convention applicable to an employee not covered by the Payment of Gratuity Act, 1972.

Siddharth's monthly basic salary during the ten months preceding retirement was ₹64,000. His DA was ₹20,000, of which 50% formed part of retirement-benefit salary, and turnover-based commission was ₹8,000 per month. Calculate the average monthly salary used in the gratuity formula for an employee not covered under the Payment of Gratuity Act, 1972. Exclude components not falling within the statutory definition.

1. ₹84,000
2. ₹92,000
3. ₹82,000 (correct answer)
4. ₹1,02,000

Answer: C — ₹82,000

Explanation. For a non-covered employee, salary includes basic salary, DA forming part of retirement benefits and commission expressed as a fixed percentage of turnover. Eligible DA = ₹20,000 × 50% = ₹10,000. Turnover commission is ₹8,000 monthly. Average salary = ₹64,000 + ₹10,000 + ₹8,000 = ₹82,000. The bonus and city allowance are excluded because they are not included in the prescribed salary definition for this calculation.

Where it goes wrong. Including the entire DA, performance bonus or city allowance instead of including only eligible DA and fixed-percentage turnover commission.

Authority. Section 19(1), Table SI No. 6 of the Income-tax Act, 2025

Question 6 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Siddharth retired after 17 years and 10 months from an employer not covered by the Payment of Gratuity Act. His average monthly salary for the preceding ten months has been computed as ₹82,000. How many years of service should be used in the non-covered employee gratuity formula, and why should the additional ten months not increase the service-year figure?

1. 18 years, by rounding any fraction upwards
2. 17 years, by ignoring the fractional period (correct answer)
3. 17 years and 10 months, proportionately
4. 16 years, by excluding the final service year

Answer: B — 17 years, by ignoring the fractional period

Explanation. For an employee not covered by the Payment of Gratuity Act, the half-month average salary formula applies for every completed year of service. Any fraction of a year is ignored. Siddharth has completed 17 full years, while the remaining 10 months do not count as another year. Therefore, the service period for calculation is 17 years. The six-month rounding convention applicable to covered employees cannot be imported into this calculation.

Where it goes wrong. Rounding 17 years and 10 months to 18 years by applying the covered-employee service convention.

Authority. Section 19(1), Table SI No. 6 of the Income-tax Act, 2025

Question 7 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Using Siddharth's average monthly salary of ₹82,000 and 17 completed years of service, compute the gratuity deduction under the half-month salary method applicable to an employee not covered by the Payment of Gratuity Act, 1972. Assume the actual gratuity received is ₹16,50,000 and the statutory ceiling is ₹20,00,000. Identify the amount determined by the formula before applying the three-way comparison.

1. ₹6,97,000 (correct answer)
2. ₹7,38,000
3. ₹8,20,000
4. ₹9,53,000

Answer: A — ₹6,97,000

Explanation. The non-covered employee formula is half-month average salary multiplied by completed years of service. Half of ₹82,000 is ₹41,000. Multiply ₹41,000 by 17 completed years: ₹41,000 × 17 = ₹6,97,000. This amount must be compared with gratuity actually received of ₹16,50,000 and the statutory ceiling of ₹20,00,000. The formula amount is therefore the lowest limit and determines the deduction.

Where it goes wrong. Using last drawn salary instead of average salary for the preceding ten months or rounding the service period to 18 years.

Authority. Section 19(1), Table SI No. 6 of the Income-tax Act, 2025

Question 8 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Siddharth received gratuity of ₹16,50,000 on retirement. His eligible average monthly salary is ₹82,000 and he has 17 completed years of service. The deduction under the non-covered employee formula is ₹6,97,000, while the notified statutory ceiling is ₹20,00,000. Determine the portion of gratuity remaining chargeable to tax after the admissible deduction.

1. ₹6,97,000
2. ₹7,00,000
3. ₹8,56,000
4. ₹9,53,000 (correct answer)

Answer: D — ₹9,53,000

Explanation. The three deduction limits are actual gratuity ₹16,50,000, statutory ceiling ₹20,00,000 and formula value ₹6,97,000. The lowest is ₹6,97,000, which is deductible. Taxable gratuity = ₹16,50,000 − ₹6,97,000 = ₹9,53,000. The fact that the actual gratuity is below the notified ceiling does not make the full receipt deductible when the formula produces a lower amount.

Where it goes wrong. Treating the statutory ceiling of ₹20,00,000 as an automatic deduction instead of restricting the deduction to the lowest of the three prescribed amounts.

Authority. Section 19(1), Table SI No. 6 of the Income-tax Act, 2025

Question 9 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Ms. Nidhi Sharma, a senior manager with Nandini Real Estates Pvt. Ltd., retired on 31 March 2027 after completing 24 years of service. Her employer permits 40 days of earned leave for each year of service. During her employment, she availed 360 days of earned leave. For determining the retirement benefit, the earned leave entitlement is subject to the prescribed maximum of 30 days for every year of service. On retirement, Nidhi received ₹30,00,000 towards encashment of the entire eligible accumulated earned-leave balance of 360 days. She had previously retired from another employer during tax year 2024-25 and had received leave encashment for which a deduction of ₹4,00,000 had been allowed under the Income-tax Act. No other leave encashment deduction was claimed in any earlier tax year. During the ten months immediately preceding retirement, Nidhi received monthly basic salary of ₹1,80,000. DA was ₹80,000 per month, of which 50% formed part of salary for retirement benefits under the employment terms. She did not receive any turnover-based commission during these ten months. The monthly salary and DA arrangements remained unchanged throughout this period. The payroll department proposes to allow the entire ₹30,00,000 because Nidhi has accumulated 360 days of earned leave. Another executive suggests reducing the cash equivalent by counting 40 days of leave for each year without applying the prescribed 30-day ceiling. Her adviser points out that the statutory monetary ceiling must also be reduced by the deduction claimed in the earlier tax year. Nidhi requests the computation of the retirement leave-encashment deduction and the resulting taxable balance. Assume that the notified overall ceiling is ₹25,00,000 and that all 360 eligible days were encashed in the current tax year.

Nidhi was entitled to 40 days of earned leave annually for 24 years and availed 360 days during her employment. For retirement leave-encashment deduction, the prescribed calculation restricts the earned leave entitlement to a maximum of 30 days for every year of service. Determine the eligible accumulated leave balance at retirement before converting it into monetary value.

1. 360 days (correct answer)
2. 600 days
3. 720 days
4. 960 days

Answer: A — 360 days

Explanation. The eligible earned leave entitlement is restricted to 30 days for each year of service, notwithstanding the employer's allowance of 40 days. Maximum leave considered = 24 × 30 = 720 days. Leave already availed = 360 days. Eligible unavailed leave = 720 − 360 = 360 days. This is the balance used for computing the cash equivalent under the retirement leave-encashment provision.

Where it goes wrong. Using the employer's actual 40-day annual entitlement rather than the statutory maximum of 30 days per year.

Authority. Section 19(1), Table SI No. 14 of the Income-tax Act, 2025

Question 10 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Nidhi retires on 31 March 2027. Her basic salary during the ten months immediately preceding retirement is ₹1,80,000 per month. DA is ₹80,000 per month, of which 50% forms part of salary for retirement benefits under the employment terms. No fixed-percentage turnover commission is received. Determine the average monthly salary relevant for calculating the ten-month salary ceiling for leave-encashment deduction.

1. ₹1,80,000
2. ₹2,00,000
3. ₹2,20,000 (correct answer)
4. ₹2,60,000

Answer: C — ₹2,20,000

Explanation. Salary for leave-encashment valuation comprises basic salary, DA forming part of retirement benefits and turnover-based commission, where applicable. Eligible DA = ₹80,000 × 50% = ₹40,000. Monthly salary = ₹1,80,000 + ₹40,000 = ₹2,20,000. Therefore, average monthly salary for the relevant ten-month period is ₹2,20,000. The corresponding ten-month ceiling is ₹2,20,000 × 10 = ₹22,00,000.

Where it goes wrong. Including the entire DA of ₹80,000 rather than only the 50% forming part of retirement benefits.

Authority. Section 19(1), Table SI No. 14 of the Income-tax Act, 2025

Question 11 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Nidhi has received ₹30,00,000 as retirement leave encashment in tax year 2026-27. The eligible accumulated leave balance is 360 days, all of which has been encashed. Her ten-month salary limit is ₹22,00,000. She had previously claimed a leave-encashment deduction of ₹4,00,000 in tax year 2024-25 from a former employer. What is the deduction available in the current year after applying the overall notified ceiling and the earlier deduction?

1. ₹25,00,000
2. ₹21,00,000 (correct answer)
3. ₹22,00,000
4. ₹30,00,000

Answer: B — ₹21,00,000

Explanation. The statutory aggregate ceiling is ₹25,00,000. Earlier leave-encashment deduction was ₹4,00,000, so the remaining ceiling is ₹25,00,000 − ₹4,00,000 = ₹21,00,000. Current actual receipt and cash equivalent are ₹30,00,000 each, while the ten-month salary limit is ₹22,00,000. The four limits are therefore ₹30,00,000, ₹30,00,000, ₹22,00,000 and ₹21,00,000. Deduction is ₹21,00,000.

Where it goes wrong. Applying the ₹25,00,000 ceiling afresh despite an earlier deduction having already reduced the aggregate entitlement.

Authority. Section 19(1), Table SI No. 14 of the Income-tax Act, 2025

Question 12 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Nidhi received ₹30,00,000 on retirement as leave encashment. Her eligible leave balance was 360 days, the ten-month salary ceiling was ₹22,00,000 and the statutory aggregate ceiling remaining after an earlier deduction was ₹21,00,000. Her current-year deduction is therefore restricted to ₹21,00,000. Determine the balance of leave encashment chargeable to tax under Salaries for tax year 2026-27.

1. ₹5,00,000
2. ₹7,80,000
3. ₹8,00,000
4. ₹9,00,000 (correct answer)

Answer: D — ₹9,00,000

Explanation. Retirement leave encashment received is ₹30,00,000. The deduction determined by applying the statutory limits is ₹21,00,000. Therefore, the taxable portion is ₹30,00,000 − ₹21,00,000 = ₹9,00,000. The previous year's deduction affects the current deduction ceiling but does not reduce the gross amount of leave encashment received during the current tax year.

Where it goes wrong. Subtracting the earlier ₹4,00,000 deduction directly from the current receipt instead of using it to reduce the aggregate statutory deduction ceiling.

Authority. Section 19(1), Table SI No. 14 of the Income-tax Act, 2025

Question 13 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Smt. Leela Rao, a Central Government employee, retires on 31 January 2027 after completing 32 years of service and receives gratuity of ₹18,60,000. No earlier gratuity payment has been received by her. Her payroll department proposes to restrict the deduction using the 15/26 formula because her service period exceeds 30 years. Determine the gratuity deduction available to Leela under the provisions applicable to Government employees.

Smt. Leela Rao, a Central Government employee, retires on 31 January 2027 after completing 32 years of service and receives gratuity of ₹18,60,000. No earlier gratuity payment has been received by her. Her payroll department proposes to restrict the deduction using the 15/26 formula because her service period exceeds 30 years. Determine the gratuity deduction available to Leela under the provisions applicable to Government employees.

1. ₹18,00,000
2. ₹15,00,000
3. ₹18,60,000 (correct answer)
4. ₹20,00,000

Answer: C — ₹18,60,000

Explanation. Gratuity received by Central Government employees under the specified Government retirement provisions is fully deductible under section 19(1), Table SI No. 3. Leela received ₹18,60,000. Therefore, the deductible amount is ₹18,60,000. The 15/26 formula and the ₹20,00,000 limit discussed for other employees do not apply to this Government employee category under the cited provision.

Where it goes wrong. Applying the private-sector covered-employee calculation to a Government employee whose gratuity is fully deductible under the applicable provision.

Authority. Section 19(1), Table SI No. 3 of the Income-tax Act, 2025

Question 14 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Mr. Raghav receives gratuity of ₹4,80,000 from his current employer on 1 December 2026 while continuing in the same employment until 31 March 2027. The company is covered under the Payment of Gratuity Act, 1972. Although the payment is described as retirement-related gratuity in the payroll records, Raghav has not retired or ceased employment. Determine the deduction available against this receipt and the amount chargeable under Salaries.

Mr. Raghav receives gratuity of ₹4,80,000 from his current employer on 1 December 2026 while continuing in the same employment until 31 March 2027. The company is covered under the Payment of Gratuity Act, 1972. Although the payment is described as retirement-related gratuity in the payroll records, Raghav has not retired or ceased employment. Determine the deduction available against this receipt and the amount chargeable under Salaries.

1. Deduction Nil; taxable ₹4,80,000 (correct answer)
2. Deduction ₹4,80,000; taxable Nil
3. Deduction ₹2,40,000; taxable ₹2,40,000
4. Deduction ₹3,60,000; taxable ₹1,20,000

Answer: A — Deduction Nil; taxable ₹4,80,000

Explanation. The gratuity deduction under the specified provisions is available in respect of gratuity received on retirement or death, subject to the relevant category. Raghav receives ₹4,80,000 while continuing employment. Therefore, no deduction is available against this payment under the retirement gratuity provisions. The entire ₹4,80,000 remains chargeable under Salaries. The description used in payroll cannot substitute for the actual circumstances of receipt.

Where it goes wrong. Treating a payment made during continuing employment as retirement gratuity merely because of its description in payroll records.

Authority. Section 19(1), Table SI No. 3 to 6 of the Income-tax Act, 2025

Question 15 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Mr. Harish retires from a private employer not covered by the Payment of Gratuity Act, 1972, after 21 years and 11 months of service. His average salary for the ten months immediately preceding retirement is ₹80,000, comprising basic salary of ₹70,000, eligible DA of ₹6,000 and fixed-percentage turnover commission of ₹4,000. He receives gratuity of ₹15,00,000. Determine the gratuity deduction under the applicable formula.

Mr. Harish retires from a private employer not covered by the Payment of Gratuity Act, 1972, after 21 years and 11 months of service. His average salary for the ten months immediately preceding retirement is ₹80,000, comprising basic salary of ₹70,000, eligible DA of ₹6,000 and fixed-percentage turnover commission of ₹4,000. He receives gratuity of ₹15,00,000. Determine the gratuity deduction under the applicable formula.

1. ₹9,00,000
2. ₹8,80,000
3. ₹8,61,000
4. ₹8,40,000 (correct answer)

Answer: D — ₹8,40,000

Explanation. The non-covered employee formula uses half-month average salary multiplied by completed years of service. The fraction of 11 months is ignored, giving 21 years. Half of the average salary is ₹80,000/2 = ₹40,000. Formula amount = ₹40,000 × 21 = ₹8,40,000. This is lower than actual gratuity of ₹15,00,000 and the statutory ceiling of ₹20,00,000. Hence, deduction is ₹8,40,000.

Where it goes wrong. Rounding 21 years and 11 months to 22 years or applying the 15/26 covered-employee formula.

Authority. Section 19(1), Table SI No. 6 of the Income-tax Act, 2025

Question 16 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Mr. Keshav retires after completing 14 years and exactly 6 months of service. His employer is covered under the Payment of Gratuity Act, 1972. His last drawn basic salary is ₹80,000 per month and DA is ₹12,000 per month. Actual gratuity received is ₹10,00,000. Determine the deduction under the 15/26 formula, paying particular attention to the meaning of a part of service exceeding six months.

Mr. Keshav retires after completing 14 years and exactly 6 months of service. His employer is covered under the Payment of Gratuity Act, 1972. His last drawn basic salary is ₹80,000 per month and DA is ₹12,000 per month. Actual gratuity received is ₹10,00,000. Determine the deduction under the 15/26 formula, paying particular attention to the meaning of a part of service exceeding six months.

1. ₹7,96,154
2. ₹7,43,077 (correct answer)
3. ₹8,40,000
4. ₹10,00,000

Answer: B — ₹7,43,077

Explanation. The covered-employee rule counts a part of a service year only where it exceeds six months. Keshav has completed 14 years and exactly six months, so the additional period does not count as another year. Last drawn salary = ₹80,000 + ₹12,000 = ₹92,000. Formula amount = 15/26 × ₹92,000 × 14 = ₹7,43,076.92, rounded to ₹7,43,077. This is below actual gratuity and the statutory ceiling.

Where it goes wrong. Rounding exactly six months upwards despite the requirement that the fraction must exceed six months.

Authority. Section 19(1), Table SI No. 5 of the Income-tax Act, 2025

Question 17 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Ms. Meenakshi is a private-sector employee who continues working for her employer throughout tax year 2026-27. In December 2026, she receives ₹3,60,000 towards accumulated earned leave, under a scheme permitting annual encashment during employment. Her employer is not covered by the Payment of Gratuity Act, 1972. Determine the amount of deduction available against this leave-encashment receipt and its chargeable portion.

Ms. Meenakshi is a private-sector employee who continues working for her employer throughout tax year 2026-27. In December 2026, she receives ₹3,60,000 towards accumulated earned leave, under a scheme permitting annual encashment during employment. Her employer is not covered by the Payment of Gratuity Act, 1972. Determine the amount of deduction available against this leave-encashment receipt and its chargeable portion.

1. Deduction ₹2,50,000; taxable ₹1,10,000
2. Deduction ₹1,80,000; taxable ₹1,80,000
3. Deduction Nil; taxable ₹3,60,000 (correct answer)
4. Deduction ₹3,60,000; taxable Nil

Answer: C — Deduction Nil; taxable ₹3,60,000

Explanation. The leave-encashment deduction under section 19(1), Table SI No. 13 and 14 applies to unutilised earned leave encashed at retirement, whether on superannuation or otherwise. Meenakshi receives ₹3,60,000 while continuing employment. Accordingly, no retirement leave-encashment deduction is available. The full ₹3,60,000 is chargeable under Salaries in the tax year of receipt, irrespective of the employer's leave-encashment scheme.

Where it goes wrong. Extending the retirement leave-encashment deduction to an employee receiving the amount while continuing in service.

Authority. Section 19(1), Table SI No. 13 and 14 of the Income-tax Act, 2025

Question 18 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. A Central Government employee retires on 30 September 2026 and receives ₹28,00,000 as encashment of accumulated earned leave. The employee has completed 30 years of service and has accumulated sufficient earned leave to support the entire payment. The payroll department applies the ten-month salary limitation and proposes to restrict the deduction to ₹20,00,000. Determine the deduction available under the retirement leave-encashment provisions.

A Central Government employee retires on 30 September 2026 and receives ₹28,00,000 as encashment of accumulated earned leave. The employee has completed 30 years of service and has accumulated sufficient earned leave to support the entire payment. The payroll department applies the ten-month salary limitation and proposes to restrict the deduction to ₹20,00,000. Determine the deduction available under the retirement leave-encashment provisions.

1. ₹28,00,000 (correct answer)
2. ₹25,00,000
3. ₹20,00,000
4. ₹14,00,000

Answer: A — ₹28,00,000

Explanation. For Government employees receiving leave encashment at retirement, the entire amount is deductible under section 19(1), Table SI No. 13. The receipt is ₹28,00,000, and the deduction is therefore ₹28,00,000. The notified monetary ceiling and the ten-month salary and earned-leave calculations applicable to non-Government employees do not restrict this Government employee's deduction.

Where it goes wrong. Applying the non-Government employee's four-limit computation to a Government employee whose retirement leave encashment is fully deductible.

Authority. Section 19(1), Table SI No. 13 of the Income-tax Act, 2025

Question 19 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Mr. Pranav retires from a private employer and receives ₹20,00,000 towards the encashment of his entire accumulated earned-leave balance of 240 days. He has completed 24 years of service and availed the balance leave already taken into account by the employer. His average monthly salary for the ten months immediately preceding retirement is ₹1,75,000. No earlier leave-encashment deduction has been claimed. Determine the deduction available after applying the four statutory limits.

Mr. Pranav retires from a private employer and receives ₹20,00,000 towards the encashment of his entire accumulated earned-leave balance of 240 days. He has completed 24 years of service and availed the balance leave already taken into account by the employer. His average monthly salary for the ten months immediately preceding retirement is ₹1,75,000. No earlier leave-encashment deduction has been claimed. Determine the deduction available after applying the four statutory limits.

1. ₹20,00,000
2. ₹17,50,000 (correct answer)
3. ₹14,00,000
4. ₹25,00,000

Answer: B — ₹17,50,000

Explanation. The four limits are statutory ceiling ₹25,00,000, actual receipt ₹20,00,000, cash equivalent of eligible leave ₹20,00,000 and ten-month salary ₹1,75,000 × 10 = ₹17,50,000. The leave balance of 240 days supports the cash equivalent of the entire receipt. The least of these limits is ₹17,50,000. Hence, the retirement deduction is restricted to ₹17,50,000.

Where it goes wrong. Using the actual encashment amount as the deduction without applying the independent ten-month salary limit.

Authority. Section 19(1), Table SI No. 14 of the Income-tax Act, 2025

Question 20 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Mr. Devendra is not covered under the Payment of Gratuity Act, 1972. While computing average salary for gratuity deduction, his monthly basic salary is ₹82,000, DA is ₹40,000 of which 50% forms part of retirement benefits, and commission is 1% of monthly turnover of ₹7,00,000. He also receives a monthly bonus of ₹25,000. Determine the monthly salary figure for the gratuity formula, excluding amounts that are not covered by the prescribed salary definition.

Mr. Devendra is not covered under the Payment of Gratuity Act, 1972. While computing average salary for gratuity deduction, his monthly basic salary is ₹82,000, DA is ₹40,000 of which 50% forms part of retirement benefits, and commission is 1% of monthly turnover of ₹7,00,000. He also receives a monthly bonus of ₹25,000. Determine the monthly salary figure for the gratuity formula, excluding amounts that are not covered by the prescribed salary definition.

1. ₹1,22,000
2. ₹1,47,000
3. ₹1,02,000
4. ₹1,09,000 (correct answer)

Answer: D — ₹1,09,000

Explanation. For a non-covered employee, gratuity salary includes basic salary, DA forming part of retirement benefits and commission expressed as a fixed percentage of turnover. Eligible DA = ₹40,000 × 50% = ₹20,000. Turnover commission = ₹7,00,000 × 1% = ₹7,000. Salary = ₹82,000 + ₹20,000 + ₹7,000 = ₹1,09,000. Bonus is not included in the prescribed definition.

Where it goes wrong. Including the full DA or monthly bonus, or excluding qualifying turnover-based commission.

Authority. Section 19(1), Table SI No. 6 of the Income-tax Act, 2025

Question 21 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Ms. Roshni retires after 22 years of service. Under her employer's leave policy, she was entitled to 45 days of earned leave each year and availed 420 days during her service. For determining the cash equivalent of earned leave at retirement, only 30 days per year may be taken into account. Determine the eligible unavailed earned-leave balance in days.

Ms. Roshni retires after 22 years of service. Under her employer's leave policy, she was entitled to 45 days of earned leave each year and availed 420 days during her service. For determining the cash equivalent of earned leave at retirement, only 30 days per year may be taken into account. Determine the eligible unavailed earned-leave balance in days.

1. 240 days (correct answer)
2. 570 days
3. 480 days
4. 660 days

Answer: A — 240 days

Explanation. The maximum earned leave taken into account for deduction is 30 days for each year of service. Eligible leave entitlement = 22 × 30 = 660 days. Leave availed = 420 days. Unavailed eligible balance = 660 − 420 = 240 days. Although the employer permits 45 days annually, the statutory calculation restricts the credited leave to 30 days for every service year.

Where it goes wrong. Using the employer's 45-day annual entitlement rather than the statutory 30-day maximum.

Authority. Section 19(1), Table SI No. 14 of the Income-tax Act, 2025

Question 22 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Mr. Manish retires on 31 March 2027. During the ten months immediately preceding retirement, basic salary was ₹1,20,000 per month for six months and ₹1,40,000 per month for four months. DA was ₹40,000 per month, with 50% forming part of retirement-benefit salary. Commission was 2% of monthly turnover of ₹5,00,000 throughout the same ten months. Calculate the average monthly salary for the retirement leave-encashment calculation.

Mr. Manish retires on 31 March 2027. During the ten months immediately preceding retirement, basic salary was ₹1,20,000 per month for six months and ₹1,40,000 per month for four months. DA was ₹40,000 per month, with 50% forming part of retirement-benefit salary. Commission was 2% of monthly turnover of ₹5,00,000 throughout the same ten months. Calculate the average monthly salary for the retirement leave-encashment calculation.

1. ₹1,48,000
2. ₹1,55,000
3. ₹1,58,000 (correct answer)
4. ₹1,68,000

Answer: C — ₹1,58,000

Explanation. Basic salary for ten months = (₹1,20,000 × 6) + (₹1,40,000 × 4) = ₹12,80,000. Eligible DA = ₹40,000 × 50% × 10 = ₹2,00,000. Commission = 2% × ₹5,00,000 × 10 = ₹1,00,000. Aggregate salary = ₹15,80,000. Average monthly salary = ₹15,80,000/10 = ₹1,58,000. The ten-month salary limit is ₹15,80,000.

Where it goes wrong. Using only the final month's basic salary or ignoring eligible DA and turnover commission when determining average salary.

Authority. Section 19(1), Table SI No. 14 of the Income-tax Act, 2025

Question 23 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Ms. Kavita retires during tax year 2026-27 and receives retirement leave encashment of ₹14,50,000 from Employer A and ₹13,00,000 from Employer B in the same tax year. Her eligible leave-credit and ten-month salary limits independently support the full receipts from each employer. She had already claimed a leave-encashment deduction of ₹2,50,000 in an earlier tax year. Assuming she is a non-Government employee, determine the aggregate deduction available for the current tax year.

Ms. Kavita retires during tax year 2026-27 and receives retirement leave encashment of ₹14,50,000 from Employer A and ₹13,00,000 from Employer B in the same tax year. Her eligible leave-credit and ten-month salary limits independently support the full receipts from each employer. She had already claimed a leave-encashment deduction of ₹2,50,000 in an earlier tax year. Assuming she is a non-Government employee, determine the aggregate deduction available for the current tax year.

1. ₹25,00,000
2. ₹22,50,000 (correct answer)
3. ₹27,50,000
4. ₹20,00,000

Answer: B — ₹22,50,000

Explanation. Aggregate current-year receipts = ₹14,50,000 + ₹13,00,000 = ₹27,50,000. The overall statutory ceiling is ₹25,00,000, reduced by the earlier deduction of ₹2,50,000. Remaining ceiling = ₹22,50,000. Since the other limits support the entire current-year receipts, the aggregate deduction is restricted to ₹22,50,000. The ceiling applies across payments from one or more employers in the relevant tax year.

Where it goes wrong. Applying the ₹25,00,000 limit separately to each employer or failing to reduce it by the deduction already claimed in an earlier year.

Authority. Section 19(1), Table SI No. 14 of the Income-tax Act, 2025

Question 24 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Mr. Rajiv retires after completing 26 years and exactly 6 months of service from a company covered under the Payment of Gratuity Act, 1972. His last drawn basic salary is ₹80,000 and DA is ₹24,000 per month. He receives gratuity of ₹15,20,000. The statutory monetary ceiling is ₹20,00,000. Determine the admissible deduction after applying the three prescribed limits, including the rule relating to a service fraction of exactly six months.

Mr. Rajiv retires after completing 26 years and exactly 6 months of service from a company covered under the Payment of Gratuity Act, 1972. His last drawn basic salary is ₹80,000 and DA is ₹24,000 per month. He receives gratuity of ₹15,20,000. The statutory monetary ceiling is ₹20,00,000. Determine the admissible deduction after applying the three prescribed limits, including the rule relating to a service fraction of exactly six months.

1. ₹15,60,000
2. ₹13,52,308
3. ₹14,40,000
4. ₹15,20,000 (correct answer)

Answer: D — ₹15,20,000

Explanation. Exactly six months does not constitute a fraction exceeding six months. Hence, service years remain 26. Last drawn salary = ₹80,000 + ₹24,000 = ₹1,04,000. Formula amount = 15/26 × ₹1,04,000 × 26 = ₹15,60,000. The other limits are actual gratuity ₹15,20,000 and statutory ceiling ₹20,00,000. The least amount is ₹15,20,000, which is deductible.

Where it goes wrong. Rounding exactly six months upwards or overlooking the actual gratuity limit when it is lower than the formula amount.

Authority. Section 19(1), Table SI No. 5 of the Income-tax Act, 2025

Question 25 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Mr. Saurabh retires after 22 years and 11 months of service from an employer not covered by the Payment of Gratuity Act, 1972. His average salary for the ten months preceding retirement is ₹75,000 per month, and he receives gratuity of ₹12,00,000. The applicable notified ceiling is ₹20,00,000. Determine the deduction under the non-covered employee formula and the balance chargeable under Salaries.

Mr. Saurabh retires after 22 years and 11 months of service from an employer not covered by the Payment of Gratuity Act, 1972. His average salary for the ten months preceding retirement is ₹75,000 per month, and he receives gratuity of ₹12,00,000. The applicable notified ceiling is ₹20,00,000. Determine the deduction under the non-covered employee formula and the balance chargeable under Salaries.

1. Deduction ₹8,25,000; taxable ₹3,75,000 (correct answer)
2. Deduction ₹9,00,000; taxable ₹3,00,000
3. Deduction ₹12,00,000; taxable Nil
4. Deduction ₹7,50,000; taxable ₹4,50,000

Answer: A — Deduction ₹8,25,000; taxable ₹3,75,000

Explanation. For a non-covered employee, a fractional service year is ignored. Saurabh therefore has 22 completed years. Half-month average salary = ₹75,000/2 = ₹37,500. Formula amount = ₹37,500 × 22 = ₹8,25,000. Compare this with actual gratuity ₹12,00,000 and notified ceiling ₹20,00,000. Deduction = ₹8,25,000. Taxable gratuity = ₹12,00,000 − ₹8,25,000 = ₹3,75,000.

Where it goes wrong. Counting 22 years and 11 months as 23 years or applying the covered-employee rounding convention.

Authority. Section 19(1), Table SI No. 6 of the Income-tax Act, 2025