Compensation received in case of voluntary retirement or separation – Section 10(10C)

• Taxation
• ||
• March 30, 2023

Introduction
Where Compensation is received at the time of voluntary retirement or in case of separation, the income received as compensation is exempt from tax if the following conditions are satisfied-

• Compensation is required to be received on voluntary retirement or voluntary separation.
• Compensation is received by an employee from the following undertakings-
  1. 1. an authority which is established under Central, State or Provincial Act;
     2. local authority;
     3. university;
     4. an Indian Institute of Technology;
     5. the State Government;
     6. the Central Government;
     7. a notified institute having importance throughout India or any State (ie., International Crops Research Institute for Semi-Arid Tropics; Action for Food Production, New Delhi, Government Tool Room & Training Centre, Rajajinagar Industrial Estate, Bangalore);
     8. notified institute of management (ie., Indian Institute of Management, Ahmedabad, Bangalore, Calcutta or Lucknow and the Indian Institute of Foreign Trade, New Delhi);
     9. public sector company; or
     10. any company or a co-operative society.
• Maximum amount of exemption is ₹ 5,00,000.
• Where exemption has been allowed to an employee for any assessment year under section 10(10C), then no exemption thereunder shall be allowed to him in relation to any other assessment year. Thus exemption u/s 10(10C) is available only once.

Prescribed Guidelines
There are some guidelines for the purpose of section 10(10C) which have been laid down in Rule 2BA. The scheme of voluntary retirement should be as per the following requirements, namely-

• it applies to only those employees who have completed their 10 years of service or completed 40 years of age (this condition is, however, not applicable if the amount is received at the time of voluntary separation from a public sector company).
•  it applies to all employees including workers and executives of a concern excepting directors of a company or a co-operative society.
• the scheme of voluntary retirement or separation has been laid down for the purpose of reduction in the existing strength of the employees.
• the resulting vacancy from voluntary retirement or separation is not to be filled up, nor the retiring employee is to be employed in another company or in any other concern belonging to the same management.
• the amount which is required to be received on account of voluntary retirement or separation of the employee, does not exceed by such an amount which is equivalent to 3 months’ salary for each completed year of service or monthly emoluments at the time of retirement that is multiplied by the remaining months of service left before the date of his retirement on superannuation, whichever is higher.

Summary
This section states that the amount received as compensation is exempt under Income Tax Act, 1961 which means that the same income will not be included while calculating income tax of such an individual if the above specified conditions are fulfilled.

Written by – Bhawna Jain

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