Exemptions on Leave Encashment 

Purpose

This process describes the computations performed by the SAP system for obtaining the exemptions on Leave Encashment.

Process Flow

The Leave Encashment Taxation payroll function (INLEA) computes the exemptions on the Leave Encashment amount received by an employee.

Exemption on Leave Encashment amount is available in cases of:

·        Termination

·        Retirement

In both termination and retirement, exemption is given on Leave Encashment amount in the following cases:

¡        Termination/retirement period is the same as the Leave Encashment payment period

¡        Termination/retirement period is before the Leave Encashment payment period in the same financial year or another financial year. All payments made after termination/retirement are exempted from tax subject to the Leave Encashment exemption limit.

¡        Termination/retirement period is after the Leave Encashment payment period but falls in the same financial year

Exemption on LEA is not given in the following case:

Termination/retirement period is before the Leave Encashment payment period but the Leave Encashment payment is made in a financial year, which is after the termination/retirement year. Also, the payment is made with effect from a period that falls in a year that is before the financial year in which the actual payment is made. In this case, Section 89(1) Relief on the Leave Encashment amount is given to the employee.

For example, the employee was terminated in February 2003. Leave Encashment payment is made to the employee in June 2004 with effect from March 2003. In this case, the employee does not get Leave Encashment exemption, instead the employee gets Section 89(1) Relief on the Leave Encashment amount.

Leave Encashment Taxation payroll function (INLEA) computes an exemption using four different factors, and then takes the minimum of the four as the exemption on Leave Encashment. The four factors and the computations of their values are as follows:

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       1.      Leave Encashment Amount

Leave Encashment Taxation payroll function (INLEA) checks the wage type for Leave Encashment in the internal table and obtains the Leave Encashment amount.

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                            a.      The Termination Workbench computes the Leave Encashment amount and stores the wage type for Leave Encashment in the Additional Payments infotype (0015). This wage type stores information on the amount and the number of months of leave encashed. Termination Workbench computes Leave Encashment amount as:

Number of months of leave encashed multiplied by the LEA basis

Where,

§         Number of months of leave encashed  = Number of months of Leave Entitled minus Number of months of leave availed

§         LEA basis = LEA Encashment basis wage type (/128)

·         Termination Workbench, by default takes one month of leave for every year of completed service. You can change this value before updating the wage type in the Additional Payments infotype (0015).

·         You can also directly enter the Leave Encashment amount in the Additional Payments infotype (0015).

                            b.      During payroll processing, the Processing request for additional payments payroll function (P0015) reads the Additional Payments infotype (0015) and stores the wage type for Leave Encashment in the internal table (IT).

                            c.      Leave Encashment Taxation payroll function (INLEA) determines the wage type associated with the tax code SLEA, from the table view Taxability of wage types (V_T7INT9). It also determines the Leave Encashment eligibility for Pay Scale Grouping for Allowances from the table view Reimbursement Allowances Perks - eligibility and calculation (V_T7INA9).

·         Ensure that you have associated the wage type for Leave Encashment with the tax code SLEA. The system provides you with a model Leave Encashment wage type (MLE0), which you can use to create the wage type for Leave Encashment.

·         Ensure that you have configured the eligibility wage type (MLE0) as Cessation Payment, in the table view Reimbursement Allowances Perks - eligibility and calculation (V_T7INA9). Cessation Payment is an option under the Reimbursement/ allowance/perk indicator field.

·         Ensure that you have entered Leave Encashment wage type only once through the Additional Payments infotype (0015). Multiple entries of Leave Encashment wage types results in an error.

                            d.      After identifying the wage type associated with the tax code SLEA, the Leave Encashment Taxation payroll function (INLEA) reads the wage type for Leave Encashment in the internal table (IT).

       2.      Exemption limit

                            a.      Payroll Function Leave Encashment Taxation (INLEA) checks for the maximum limit on the Leave Encashment amount, which can be exempt from tax. The maximum limit is as specified by the authorities. You can view the tax limit for the tax code SLEA using the table view Taxability of wage types (V_T7INT9).

                            b.      If the employee, in any previous employment, received an exemption on the Leave Encashment amount, the Payroll Function Leave Encashment Taxation (INLEA) will reduce the maximum limit on exemption by the amount already availed.

You can maintain the Leave Encashment exemption, claimed in a previous employment using the Previous Employment Tax Details infotype (0580). The Leave Encashment Exemt wage type (/4V7) stores the previous exemption amount.

       3.      Product of the Average Monthly Salary and the Multiplication factor

                            a.      Average Monthly Salary– The Leave Encashment Taxation payroll function (INLEA) computes the Average Monthly Salary for Leave Encashment, as the average of the basis salary for a pre-defined number of months, preceding the period of termination/retirement. The Leave Encashment Basis wage type (/128) stores the monthly basis salary for Leave Encashment.

The No. of months for avg. salary constant (NMAVS) of table view Payroll Constants (V_T511K) stores the pre-defined number of months for computing the Average Monthly Salary. The value is as specified by the authorities.

If basis salary data for the required number of months is not available in the SAP system, you can enter the same through the Additional Payments infotype (0015). Ensure that you pass the wage type for average salary as the first parameter (param 1), to the Leave Encashment Taxation payroll function (INLEA). You can use the model wage type Avg sal pre-instln wage type (MLIN) to create the wage type for average salary.

                            b.      Multiplication factor– The Multiplication factor-Avg. Sal constant (MFAVS) of table view Payroll Constants (V_T511K) stores the multiplication factor for Leave Encashment. The factor is as specified by the authorities.

       4.      Product of the Average Monthly Salary and the Number of months of leave encashed

                            a.      Average Monthly Salary- Leave Encashment Taxation payroll function (INLEA) computes the Average Monthly Salary as the average of the Leave Encashment basis, for a pre-defined number of months of employment. It refers to the No. of months for avg. salary constant (NMAVS) in the table view Payroll Constants (V_T511K), for the pre-defined number of months of basis salary.

                            b.      Number of months of leave encashed - The Leave Encashment Taxation payroll function (INLEA) determines the Number of months of leave encashed from the value stored in the number field, of the wage type for Leave Encashment. The Additional Payments infotype (0015) stores the wage type for Leave Encashment.

After selecting the minimum of the four exemption factors, the Leave Encashment Taxation payroll function (INLEA) generates the Leave Salary Exemption wage type (/4E7), in which it stores the current exemption on Leave Encashment.

Result

·        Income Tax – The Leave Salary Exemption wage type (/4E7) is taken up by the Income Tax functionality for cumulating into the Exemption U/S 10 wage type (/130).

·        When you process the payroll for the employee in a period after termination/retirement, the system will import the Leave Encashment exemption results, from the termination/retirement period or any other previous payment periods, into the period in consideration.

The Processing the last results table payroll function (PLRT) makes use of the B/F Termination related exemptions for Payroll after termination rule (INTT) to import the results. The rule checks the Last Results Table (LRT) for Leave Encashment wage types and imports them into the current period. The system does not make any changes to the imported results.

Example

An employee received a Leave Encashment at the time of termination. The details of the employee are as follows:

·        Leave Encashment received = Rs. 1,69,000.00

·        Average monthly salary = Rs. 8,500

·        No. of years in service = Twelve Years

·        Leave entitled = Twelve months

·        Leave availed = Eight months

Exemption on Leave Encashment received by the employee, will be the minimum of:

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       1.      Exemption on Leave Encashment Amount received by the employee = Rs. 1,69,000.00

       2.      Exemption Limit = Rs. 2,40,000 (minus any amount already claimed by the employee in a previous employment)

       3.      Product of the Average Monthly Salary and the Multiplication factor = 8500 * 10 = Rs. 85,000.00

       4.      Product of the Average Monthly Salary and the Number of months of leave encashed = 8500 * (12 - 8)  = Rs. 34,000

The system will therefore, take Rs. 34,000 as the exemption on the Leave Encashment amount.