Section 10(10B)- Tax Exemption for Retrenchment Compensation to a Workmen

Section 10(10B) of the Income Tax Act, 1961 provides important tax relief for workmen who receive compensation due to retrenchment. This provision is designed to ease the financial burden on employees who lose their jobs involuntarily. Below is a detailed explanation with practical examples to help understand how this exemption works.

Key Provisions of Section 10(10B)

Section 10(10B) exempts any compensation received by a workman at the time of retrenchment under:

• The Industrial Disputes Act, 1947
• Any other Act, rules, orders or notifications
• Any standing orders
• Any award or contract of service

The exemption amount is the least of the following three limits:

1. The actual compensation received
2. ₹5,00,000 (amount specified by Central Government)
3. 15 days’ average pay for every completed year of service or part thereof in excess of 6 months

Conditions for Availing Exemption

To qualify for this exemption:

• The recipient must be a “workman” as defined under the Industrial Disputes Act, 1947
• The termination must qualify as retrenchment (not voluntary resignation)
• Compensation must be received on or after April 1, 1976
• The employee must not have received any gratuity from the employer

Practical Examples

Example 1: Compensation Below ₹5 Lakh Limit

Scenario: Mr. A, a workman, is retrenched after 8 years of service. His average pay (basic + DA) is ₹30,000 per month. He receives ₹3,00,000 as retrenchment compensation.

Calculation:

1. Actual compensation received: ₹3,00,000
2. Statutory limit: ₹5,00,000
3. 15 days’ pay per year: (15/30 × ₹30,000) × 8 = ₹1,20,000

Exemption: Least of above = ₹1,20,000
However, since actual compensation (₹3,00,000) is less than statutory limit, full amount is exempt

Example 2: Compensation Exceeding ₹5 Lakh Limit

Scenario: Ms. B, a workman with 20 years of service and average pay of ₹50,000, receives ₹10,00,000 as retrenchment compensation.

Calculation:

1. Actual compensation: ₹10,00,000
2. Statutory limit: ₹5,00,000
3. 15 days’ pay per year: (15/30 × ₹50,000) × 20 = ₹5,00,000

Exemption: Least of above = ₹5,00,000
Taxable amount: ₹10,00,000 – ₹5,00,000 = ₹5,00,000

Example 3: Partial Year Calculation

Scenario: Mr. C worked for 12 years and 8 months with average pay of ₹40,000. He receives ₹6,50,000 as compensation.

Calculation:

1. Actual compensation: ₹6,50,000
2. Statutory limit: ₹5,00,000
3. 15 days’ pay calculation:

• Completed years: 12
• Part in excess of 6 months: 8 months counts as another year (as it’s >6 months)
• Total: 13 years
• (15/30 × ₹40,000) × 13 = ₹2,60,000

Exemption: Least of above = ₹2,60,000
Taxable amount: ₹6,50,000 – ₹2,60,000 = ₹3,90,000

Example 4: Special Approved Scheme

Scenario: Ms. D receives ₹8,00,000 under a Central Government approved retrenchment scheme after 15 years of service (average pay ₹45,000).

Special Provision: When compensation is received under a Central Government approved scheme, the entire amount is exempt regardless of limits

Exemption: Full ₹8,00,000 (since it’s under approved scheme)

Important Points to Note

1. Definition of Workman: Only those falling under Industrial Disputes Act definition qualify – typically excludes managerial/administrative personnel
2. Relief Under Section 89: For amounts exceeding exemption limit, relief can be claimed under Section 89 to reduce tax burden
3. Not Applicable For:

• Voluntary resignations
• Self-employed individuals
• Compensation from non-employer sources

4. Multiple Employers: The ₹5 lakh limit applies aggregately across all employers in same or different years
5. Deemed Retrenchment: Compensation during business closure/transfer may qualify if service terms become less favourable.