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
|
Computation
of Taxable Retrenchment Compensation
|
||||
|
S.
No.
|
Particulars
|
Amount
(in
Rs.)
|
Amount
(in
Rs.)
|
|
|
(1)
|
Amount
Received as Retrenchment
|
|
7,00,000
|
|
|
|
compensation
|
|
|
|
|
(2)
|
Less
: Exemption under section 10(10B):
|
|
5,00,000
|
|
|
Least
of the following:
|
||||
|
(i)
|
Actual
amount Received
|
6,50,000
|
|
|
|
(ii)
Amount determined under the
|
6,00,000
|
|||
|
|
Industrial
Disputes Act, 1947
|
|
2,00,000
|
|
|
(iii)
Maximum Amount
|
5,00,000
|
|||
|
(3)
|
Taxable
amount of Retrenchment
|
|
||
|
|
Compensation
(1) – (2)
|
|
|
|
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).
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