Compensation on retrenchment – Exemption as per the provisions of Section 10(10(B) of Income Tax Act, 1961

Compensation on retrenchment – Exemption as per the provisions of Section 10(10(B) of Income Tax Act, 1961

Any compensation received by a workman under the Industrial Disputes Act, 1947, or under any other Acts or rules or any order or notification issued thereunder; or under any standing orders; or under any award, contract of service or otherwise, at the time of retrenchment, is exempt as under:—

Quantum of deduction :

The least of following amount is exempt:—

(i)   actual amount received.

(ii)  15 days’ average pay for every completed year of service or part thereof in excess of 6 months; in accordance with the provisions of section 25F(b) of the Industrial Disputes Act, 1947; or

(iii) amount as specified by the Central Government (i.e., Rs.5,00,000/-);

Ø  With effect from the assessment year 1986-87, the aforesaid limit will not apply in cases where the compensation is paid under any scheme approved by the Central Government.

Ø  Compensation in excess of the aforesaid limit is taxable as salary which is, however, eligible for relief under section 89 read with rule 21A.

Essential conditions:

Compensation is received by a workman at the time of :

(i)   Closing down of the undertaking.

(ii) Transfer (irrespective of by agreement/compulsory acquisition) if the following conditions are satisfied :

(a)  Service of workman interrupted by transfer.

(b) Terms and condition of employment after transfer are less favourable.

(c)  New employer is not under a legal obligation whether under the terms of transfer or otherwise to pay compensation on the basis that the employer & service has been continuous and has not been interrupted by transfer.

(iii)  The retrenchment compensation received by a workman is exempt provided that in general it does not exceed the sum calculated on the basis provided in section 25F(b) of Industrial Disputes Act, 1947 or any such amount as is specified by the Central Government by a Notification, whichever is less.

(iv) Retrenchment compensation upto 5 lakhs is not taxable and if it exceeds it is subjected to tax. However, exemption is applicable only once. Compensation received in excess of the aforesaid limit is taxable and would form part of Gross Salary. However assessee will be eligible for relief under section 89 read with Rule 21A.

KEY NOTE

Compensation received by a workmen at the time of closing of down of the undertaking in which he is employed shall be deemed to be the compensation received at the time of retrenchment

Compensation received at the time of transfer of ownership of management and the service of such workmen has been affected then such compensation shall also be deemed to be received at the time of retrenchment

The period of 6 months or excess thereof will be considered a full year, if period of employment is less than 6 months, it will not be considered a full year.

While calculating retrenchment compensation, Basic Wages, Dearness Allowance, all allowances for attendance , House Rent , Conveyance  etc shall have to be considered. The value of housing provided as well as value of amenities provided along with housing also will have to be considered.

The section 25F(b) of Industrial Disputes Act provides a retrenchment amount equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of 6 months. It is calculated basing on the previous income chart, multiplying income per day with number of years worked and again with 15.

What is not Included

Retrenchment does not cover the following:

(a)    Voluntary retirement of the employee.

(b)   Employee’s retirement at the age of superannuation.

(c)    Termination of service of workman as a result of non-renewal of the contract of employment.

(d)   Termination of workman owing to continued ill-health.

PROVISIONS ILLUSTRATED

Ex-gratia from employer for settling industrial dispute is eligible for exemption under Section 10(10B) of the Income-tax Act

In the case of Vishnu Mohan T. Nair, it was held that the taxpayer is entitled to exemption under Section 10(10B) of the Act, with respect to ex-gratia amount received by the taxpayer under an ‘out-of court’ settlement for termination of service.

[Vishnu Mohan T. Nair v. ITO : Date of Judgement : 02.01.2018 (ITAT Ahmedabad)]

Hon’ble Supreme Court’s judgment in the case of Mahendra Singh Dhantwal v. Hindustan Motors Ltd (1985) 152 ITR 68 (SC), wherein compensation in lieu of reinstatement was treated as eligible for retrenchment compensation under section 10(10B).