Q Is there any tax exemption on the encashment of privilege leave or earned leave while in service in a non-government company?
(A) Section 10(10AA) provides exemption in respect of amount received by way of encashment of unutilsed earned leave by an employee at the time of his retirement on superannuation or otherwise. The exemption is to the extent of the least of the following:
(i) Rs 3 lakh
(ii) Leave salary actually received.
(iii) Last 10 months average salary.
(iv) Cash equivalent of leave (based on 10 months average salary immediately preceding the date of retirement). However, earned leave entitlement cannot exceed 30 days for every year of actual services rendered for the employer from whose service he has retired. Since you received the leave encashment during the period of service, it is fully taxable and would form a part of the salary. The encashment of leave during the service is fully taxable even in the hands of a government employee.
Q I have term deposits, where I have opted for interest payment every quarter.
In such case, the bank was supposed to pay the interest in a single event, at every quarter from the date of its deposit. However, the bank is deducting tax deduction at source (TDS) on accrued interest at every quarter and withholds such accrued interest after deducting tax. Is the bank right in withholding interest after deducting the tax? Though the bank does not actually pay the accrued interest to me, it files 26AS to claim the interest as paid subjecting to TDS. I believe only deposits on cumulative basis, where the deposit is paid with total accrued interest on compounding basis, in lump sum, at the time of maturity, are subjected to TDS on accrued interest at every quarter, but not in my case. Kindly tell me if the bank was right in its approach,
(A) As per Section 194A of the Income-Tax Act, the deduction of tax must be made at the time of crediting such interest to the payee or at the time of its payment in cash or by any other mode, whichever is earlier. In your case, the bank has credited interest on a quarterly basis while payment is being made at the time of maturity along with principal amount invested. Thus the bank is deducting TDS on a quarterly basis on the accrued interest as the date of credit of interest is earlier to date of payment. Hence, the bank is right in deducting TDS at the end of the quarter as the amount is credited to your term deposit.
(The writer is a Hyderabad-based CA. You can send your queries to firstname.lastname@example.org)...