‘Retrenchment’ means the termination of the service, by the employer, of a workman for any reason other thana punishment imposed by way of disciplinary action. Termination of an employee in such a manner is financially compensated by the employer, and such financial compensation is termed as ‘retrenchment compensation’.

Section 10(10B) of the Income Tax Act provides exemption towards such retrenchment compensation received by the workman. The exemption provisions of section 10(10B) along with the amount of exemption available thereon is explained in the present article.

Exemption available under section 10(10B) of the Income Tax Act

Provisions of section 10(10B) exempt any compensation received, at the time of retrenchment, by the workmen under-

  • The Industrial Disputes Act, 1947, or
  • Any other Act or Rules, any orders or notifications issued there under, or
  • Any standing orders or under any awards, contracts of service or otherwise.

An amount of exemption available under section 10(10B) of the Income Tax Act

Lower of the following amount is available as an exemption under section 10(10B)

1. The amount of retrenchment compensation received; or

2. The amount specified by the Central Government (i.e. INR 5 Lakhs); or

3. The amount calculated as per the provisions of section 25F(b) of the Industrial Disputes Act, 1947 i.e. an amount equal to 15 days average pay for each completed year of the service or part thereof in excess of 6 months.

However, it should be noted that the above exemption limit is not applicable in respect of the retrenchment compensation received, by the workman, in accordance with any scheme approved by the Central Government. However, such a scheme should be with regard to the need for extending the special protection to the workman in the undertaking to which such scheme applies and other relevant circumstances.

Certain important points about Exemption towards retrenchment compensation received by workman Section 10(10B)

  • Any compensation received under following circumstances shall be deemed to have been received at the time of retrenchment and, accordingly, an exemption under section 10(10B) shall be available-
    • Any compensation received by the workman at the time of the closing down of the undertaking.
    • Any compensation received by the workman at the time of transfer of the management or ownership of the undertaking shall be deemed to be compensation received at the time of retrenchment only under the following circumstances-
      • The new terms and conditions of the service are in any way less favorable to the workman as compared to the terms and conditions immediately before the transfer; or
      • The service of the workman should have been interrupted by such transfer; or
      • The new employer is legally not liable to pay to the workman (in the event of his retrenchment) compensation on the basis that the service of the workman has been continuous and has not been interrupted by such transfer.

Table – Articles on Section 10 Exemptions

Sr. No. Particulars
1 Section 10(1)– Exemption to Agricultural Income
2 Section 10(2) Exemption to amount received by co-parcener from HUF
3 Section 10(2A) Exemption towards share of income from firm/LLP
4 Exemptions towards interest to non-residents | Section 10(4) & 10(4B)
5 Exemption on Tax paid by Govt or Indian concern on certain income of a foreign company
6 Section 10(7) Perquisites/allowances exemption to Govt employees serving outside India
7 Exemption- Section 10(8A) & section 10(8B) of Income Tax Act
8 Exemption towards commuted value of pension Section 10(10A)
9 Exemption towards retrenchment compensation received by workman Section 10(10B)
10 Section 10(10BC) Exemption towards compensation received on account of any disaster
11 Section 10(10C) Exemption of amount received on voluntary retirement
12 Exemption towards tax paid by employer on non-monetary perquisites: Section 10(10CC)
13 Section 10(10D) Exemption towards amount received under a Life Insurance Policy
14 Exemption for amount received from Statutory & Recognized PF
15 Exemption for payment from approved superannuation fund Section 10(13)
16 Income Tax Exemption on prescribed allowances/ benefits | Section 10(14)
17 Section 10(15) Exemption- Interest on Bonds, Debentures, Securities
18 Scholarship exemption | Section 10(16) | Income Tax Act 1961
19 Exemption towards income for administration of Charitable or Religious Institution
20 Section 10(32) Exemption | Income of minor clubbed with parent
21 Exemption for dividend income received from Indian Company | Section 10(34)
22 Section 10(34A) Exemption towards income received by a shareholder on buy back of shares
23 Section 10(35) Exemption towards income received from units
24 Section 10(37) Exemption towards Capital Gain arising on Compulsory Acquisition of Urban Agricultural Land

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