Most of the employees receive compensation in connection with termination of employment and there is a circumstance under which such compensation is exempt from income tax. Retrenchment compensation received by workers under Industrial Disputes Act or any other similar laws, rules, order etc. is exempt from tax to the extent that the payment does not exceed the amount payable under the Act, that is, @ 15 days wages for every completed year of continuous service subject to maximum as may be prescribed. The Central Government, in pursuance of the power conferred on it, has enhanced the maximum limit to Rs. 5,00,000/- where retrenchment is on or after 1.01.1977.

The said limit of the tax exempt amount may be relaxed by the Central Government in case where the workers deserve special protection.

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