Tax On Compensation Received

Retrenchment & VRS Compensation Taxation

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Tax On Compensation Received during Retrenchment [Section 10(10B)]

Tax On Compensation Received during Retrenchment :- Retrenchment normally refers to removal of the employees by the Employer, especially as a measure to reduce cost.

However, as per section 2(oo) of the Industrial Disputes Act, 1947, "retrenchment" means the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include: -

  • voluntary retirement of the workman; or
  • retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or
  • termination of the service of the workman as a result of the non-renewal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or
  • termination of the service of a workman on the ground of continued ill-health.

Tax On Compensation Received: Any compensation received by the employee at the time of his removal as specified in the above circumstances is called as "retrenchment compensation".

Further, as per the Explanations (a) and (b) to the section 10(10B), the following compensations paid are deemed to be "retrenchment compensation": -

  1. compensation received by a workman at the time of the closing down of the undertaking in which he is employed;
  2. compensation received by a workman, at the time of the transfer (whether by agreement or by operation of law) of the ownership or management of the undertaking in which he is employed from the employer in relation to that undertaking to a new employer, if: -
    1. the service of the workman has been interrupted by such transfer; or

    2. the terms and conditions of service applicable to the workman after such transfer are in any way less favourable to the workman than those applicable to him immediately before the transfer; or

    3. the new employer is, under the terms of such transfer or otherwise, legally not liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer.

Tax On Compensation Received :- Exemption is available under section 10(10B) of the Act, only if the compensation received by a workman from the employer is at the time of his retrenchment under: -

  1. the Industrial Disputes Act, 1947, or any other Act or Rules, orders or notifications issued thereunder, or
  2. any standing order, orders or under any award, contract of service or otherwise.

For this purpose, the expressions "employer" and "workman" shall have the same meanings as in the Industrial Disputes Act, 1947.

As per section 2(g) of the Industrial Disputes Act, 1947, "employer" means-

  1. in relation to an industry carried on by or under the authority of any department of the Central Government or a State Government, the authority prescribed in this behalf, or where no authority is prescribed, the head of the department;

  2. in relation to an industry carried on by or on behalf of a local authority, the chief executive officer of that authority.

As per section 2(s) of the Industrial Disputes Act, 1947, "workman" means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person: -

  1. who is subject to the Air Force Act, 1950, or the Army Act, 1950, or the Navy Act, 1957; or

  2. who is employed in the police service or as an officer or other employee of a prison; or

  3. who is employed mainly in a managerial or administrative capacity; or

  4. who, being employed in a supervisory capacity, draws wages exceeding Rs.1,600 per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature.

Tax On Compensation Received - Exemption is available to the following extent: -

Under a scheme approved by Central Government, having regard to the need for extending special protection to the workmen in the undertaking to which such scheme applies and other relevant circumstances the whole amount is exempt.

Tax On Compensation Received - Least of the following amount is exempt: -

Amount determined as per section 25F(b) of the Industrial Dispute Act, 1947, i.e., 15 days average salary for every completed years of continuous service or part thereof in excess of 6 months.

Rs.5,00,000 where retrenchment is on or after 01.01.1997 [Notification No. 10969 dated 25.06.1999].

"Average pay" means the average of the wages payable to a workman -

  1. in the case of monthly paid workman, in the three complete calendar months,
  2. in the case of weekly paid workman, in the four complete weeks,
  3. in the case of daily paid workman, in the twelve full working days,

preceding the date on which the average pay becomes payable if the workman had worked for three complete calendar months or four complete weeks or twelve full working days, as the case may be, and where such calculation cannot be made, the average pay shall be calculated as the average of the wages payable to a workman during the period he actually worked - section 2(aaa) of the Industrial Disputes Act, 1947.

As per section 2(rr) of the Industrial Disputes Act, 1947, "wages" means all remuneration capable of being expressed in terms of money, which would, if the terms of employment, expressed or implied, were fulfilled, be payable to a workman in respect of his employment, or of work done in such employment, and includes: -

  1. such allowances (including dearness allowance) as the workman is for the time being entitled to;

  2. the value of any house accommodation, or of supply of light, water, medical attendance or other amenity or of any service or of any concessional supply of food grains or other articles;

  3. any traveling concession;

  4. any commission payable on the promotion of sales or business or both;

but does not include: -

  1. any bonus;

  2. any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the workman under any law for the time being in force;

  3. any gratuity payable on the termination of his service;

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Tax On Compensation Received during Voluntary Retirement/Separation [Section 10(10C)]

Tax On Compensation Received during Voluntary retirement: "Voluntary retirement" refers to the voluntary retirement or termination by an employee of his service, in accordance with any scheme(s) of voluntary retirement framed and offered by the employer.

The compensation offered at the time of such "voluntary retirement" is termed as "Voluntary Retirement Compensation".

Tax On Compensation Received :

Exemption is available only to the employees of the following employers.

Companies & Societies

  • Public Sector Company
  • an authority established under a Central, State or Provincial Act

  • Any other Company

  • Co-operative Societies

Government & Authority

  • the Central Government

  • Any State Government

  • Local Authority

Any other Notified Institute

  • International Crops Research Institute for Semi-Arid Tropics - Notification No.153 dated 19.06.2004

  • Action for Food Production, New Delhi - Notification No.124 dated 26.03.2004

Tax On Compensation Received :- Exemption to the employee is available only if the scheme framed by the above mentioned employers, except the Central Government or any State Government, is in accordance with such guidelines (including inter alia criteria of economic viability) prescribed (as per rule 2BA) below.

  • the scheme applies to an employee who has completed 10 years of service or attained the age of 40 years (this Condition is not applicable to Voluntary Separation Schemes framed by Public Sector Undertakings).

  • the scheme applies to all employees (by whatever name called) including workers and executives of a company or of an authority or of a co-operative society but excluding directors of a company or of a co-operative society.

  • the scheme of voluntary retirement or voluntary separation has been drawn to result in overall reduction in the existing strength of the employees.

  • the vacancy caused by voluntary retirement or voluntary separation is not to be filled up.

  • the retiring employee of a company shall not be employed in another company or concern belonging to the same management.

  • Voluntary Retirement or Separation Compensation does not exceed any one of the following: -

    • last drawn salary x 3 x completed year of service
    • last drawn salary x remaining months of service

[For this purpose of calculating Tax On Compensation Received, Salary = (Basic Pay + Dearness Allowance, if terms of employment provide + Commission as a Fixed Percentage on Turnover) of the last month before Voluntary Retirement.]

Tax On Compensation Received :- Exemption is available only once in the lifetime of an employee. The quantum of exemption is least of the following: -

  • Last drawn salary x 3 x completed year of service (or) Last drawn salary x remaining months of service, whichever is higher.

  • Actual voluntary retirement compensation received or receivable.

  • Rs.5,00,000.

Where exemption has been allowed to an employee under this section for any assessment year, no exemption there-under shall be allowed to him in relation to any other assessment year.

Further, where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this section shall be allowed to him in relation to such, or any other, assessment year.

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