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Severance pay doesn’t absolve you from advance tax payment; know how much tax to pay and advance tax schedule to follow
Severance pay doesn’t absolve you from advance tax payment; know how much tax to pay and advance tax schedule to follow
When a company lets you go for reasons unrelated to your job performance like layoffs or downsizing, you typically receive a severance package. Some companies even offer up to three months’ salary as part of that package. While this can serve as a financial buffer during uncertain times, it’s crucial to know the tax laws regarding severance to avoid any tax demand notice.
Chartered Accountant (Dr.) Suresh Surana said that the Finance Act, 2001, expanded the scope of Section 17(3) with effect from 1 April 2002.
Before this amendment, in some cases, certain termination-related payments such as voluntary severance payouts were treated as capital receipts on the premise that they compensated for the loss of employment rather than representing consideration for services rendered. This position led to disputes over interpretation and inconsistent judicial outcomes.
To clear up this confusion, Section 17(3)(iii) was inserted, explicitly classifying any sum received in connection with the commencement or cessation of employment as taxable salary, unless a specific exemption applies under Section 10.
Surana says: “Therefore, after April 1, 2002, the taxability of such receipts does not depend on the terminology used (e.g., severance, ex-gratia, compensation), the method of payment, or whether the payment was voluntary or contractual.”
The legal presumption now is that all termination-related amounts constitute “profits in lieu of salary” and are taxable, except where expressly exempted under the IT Act.
According to Surana, in cases wwhere severance pay is characterised as “profits in lieu of salary” under Section 17(3), the amount must be reported as part of salary income while filing the Income Tax Return (ITR).
Surana says: “The taxpayer is required to disclose such income under the schedule pertaining to “Salary” in the ITR (i.e. Schedule S), and the amount should match the income reflected in Form 16 and Form 26AS. Since severance compensation is treated as taxable salary, it is taxed at normal slab rates applicable to the individual.”
Surana says that you must ensure that tax withheld by the employer (TDS) against such severance is correctly reported in the TDS schedules of the ITR.
Surana says: “If any component of the severance payment qualifies for exemption (for example, gratuity under Section 10(10), retrenchment compensation under Section 10(10B), or amounts covered under Section 10(10C) for eligible VRS), only the eligible portion may be reduced, with the balance forming part of taxable salary.”
According to Surana, since the severance amount is treated as salary income, no separate deduction is allowed specifically against this component (such as expenses or cost of employment loss).
Surana says: “However, the standard deductions (Rs 75,000 under new tax regime) ordinarily available u/s 16(ia) under the salary head may apply and, where applicable, deductions for professional tax under Section 16(iii).”
According to Surana, beyond these, deductions under Chapter VI-A (such as Section 80C, 80D, 80CCD(1B), etc.) may also be availed under the old tax regime, subject to eligibility and overall taxable income.
Surana says: “Accordingly, severance compensation, once taxable under Section 17(3), is effectively treated at par with any other salary component for both reporting and tax computation purposes.”
Surana says in cases where severance compensation forms part of taxable salary income in accordance with Section 17(3), the liability to pay advance tax will depend on whether the tax has already been deducted at source by the employer.
Ordinarily, salary income is subject to TDS under Section 192, and where the employer appropriately withholds tax on the severance amount, the employee is generally not required to separately discharge advance tax on such income.
Surana says: “However, if the employer does not deduct tax, deducts insufficient tax, or the severance payment alters the individual’s total estimated tax liability such that the net tax payable (after credit of TDS, TCS, relief and MAT credit) exceeds Rs 10,000 during the relevant financial year, the provisions of Section 208 are applicable and the taxpayer becomes liable to pay advance tax.”
In such cases, advance tax must be discharged as per the statutory installments prescribed under Section 211 i.e. 15%, 45%, 75% and 100% of the assessed tax payable by 15 June, 15 September, December 15 and March 15, respectively.
Surana says: “If the severance payment is received later in the financial year after some or all installment due dates have passed, the taxpayer is required to pay the remaining proportion of advance tax in the next applicable installment.”
Needless to say but failure to pay the required advance tax may result in interest consequences under Sections 234B and/or 234C.
Source: Msn.com
Source: OfficeNewz
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