Retrenchment Compensation – Taxability

Retrenchment Compensation means any payment received by an employee on termination of his contract of service either due to his professional misconduct, violation of Company policies, or due to incapability of the company to continue any of its units further.

TAXABILITY:

Retrenchment Compensation received by a workman under the Industrial Disputes Act 1947 or any other Act is exempted to the following limits.

Least of the following is exempt:

  1. Amount actually received.
  2. 15 days average pay for every completed year of continuous service or part thereof in excess of 6 months.
  3. Basic exemption limit of 5, 00,000.

For this purpose, average pay will be calculated as under:

  • if the workman is entitled to monthly salary, then on the basis of the salary of last three calendar months; or
  • if the workman is entitled to weekly wages, then on the basis of wages of last four completed weeks; or
  • if the workman is entitled to daily wages, then on the basis of wages of last twelve full working days.

EXAMPLE

Mr. X is an employee of Bajaj Auto. Due to his ill behavior, he is retrenched from the services of  the Co. after serving 5 years 7 months. He received an amount of Rs 3, 00,000. During his employment he was getting a monthly salary of Rs 45,000.

COMPUTATION

Least of the following is exempt:

  1. Amount actually received                                 3,00,000
  2. 15 days average pay* no.of yrs served         1, 35, 000

(45000*3/90)*6*15

3.  Maximum exemption limit                                 5,00,000

___________

Exempted amount                                                               1, 35,000

Taxable Amount                                                                   1,65,000

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