Section 10(10B) of the Income Tax Act provides for Exemption on Retrenchment Compensation. Income Tax Section 10(10B) shall be read in association with Section 89. When an Undertaking is being closed down, the workmen will be paid a compensation for the act of Retrenchment. Such amount paid to workers shall be exempt under section 10(10B) of the Income Tax act. You should note that the scope of Section 10(10B) is very limited.
Scope of Section 10(10B) Income Tax Act
Any compensation received by a workman under the Industrial Disputes Act, 1947 or under any other Act or rules, orders or notifications issued thereunder or under any standing orders or under any award, contract of service or otherwise, at the time of his retrenchment. The amount is exempt under this clause to the extent of least of the following limits:
- Actual amount received.
- Amount specified by Central Government i.e. Rs.5,00,000.
- An amount calculated in accordance with the provisions of clause (b) of Section 25F of the Industrial Disputes Act, 1947 i.e. 15 day’s average pay for every completed years of services or part thereof in excess of 6 months
Non Applicability of Section 10(10B) of Income Tax Act
It may be noted that the above provision shall not apply in respect of any compensation received by a workman in accordance with any scheme which the Central Government may, having regard to the need for extending special protection to the workmen in the undertaking to which such scheme applies and, other relevant circumstances, approve in this behalf and the entire amount of compensation so received shall be exempt.
Retrenchment Meaning u/s 10(10B) Income Tax Act
For this purpose retrenchment includes the closing down of the undertaking and transfer of the ownership or management of the undertaking provided the service of the workman has been interrupted by transfer; or the new terms and conditions of service are less favourable to him; or the new employer is, under the terms of 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. “Wages”, in the context of Section 10(10B), means:
All remuneration capable of being expressed in terms of money, which would be payable to a workman in respect of employment or of work done in such employment, if the terms of employment, express or implied, were fulfilled.
Wages under section 10(10B) Income Tax Act
The term “Wages” also include (i) such allowances, including DA as the workman is entitled to; (ii) the value of any house accommodation, or supply of light, water, medical attendance or other amenity, or of any other service, concessional supply of foodgrains, or other articles; and (iii) any travel concession
However, “wages do not include: (i) any bonus; (ii) contribution to a retirement benefit scheme; (iii) any gratuity payable on the termination of his service
Where the retrenchment compensation received by a workman exceeds the amount which qualifies for exemption under the new clause, he will be entitled to relief under section 89 read with rule 21A of the Income Tax Rules, in respect of such excess