Tax on Compensation on Voluntary Retirement or Separation

Following up on our post regarding tax on pensions, we now look at the tax treatment of compensation received on voluntary retirement or separation.

As per Section 10(10C) any compensation received upon voluntary retirement or separation is exempt from tax when the following conditions are fulfilled

  • Compensation received is towards voluntary retirement or separation
  • Maximum compensation received is Rs 5,00,000.
  • Exemption when allowed for a assessment year, will not be allowed for any other assessment year.
  • The recipient is an employee of an authority established under the central or state act, local authority, university, IIT, state government or central government, notified institute of management, or a notified institute with importance throughout India or any state, PSU, company or cooperative society.
  • The receipts are in compliance with Rule 2BA
  • Where relief under section 89 has been taken by an employee for compensation for voluntary retirement or separation or termination of services – no exemption shall be available under this section for the same assessment year or any other assessment year.

Rule 2BA – the scheme of voluntary retirement must fulfill these conditions-

  • The recipient must have completed 10 years of service or 40 years of age (not applicable to employees of a PSU) – therefore a less than 40 years old employee of a company which is less than 10 years old will not able to satisfy this condition and therefore no exemption will be available to such an employee.
  • The scheme is applied to all employees, including workers & executives of a concern excluding directors of a company or a co-operative society.
  • The scheme shall result in overall reduction of the existing strength of the employees of the company.
  • The vacancy caused by voluntary retirement or separation is not filled up, and the retiring employee must not be employed in another company or concern belonging to the same management.
  • The amount receivable does not exceed 3 month’s salary for each completed year of service OR monthly emoluments at the time of retirement multiplied by balance months of service left before the date of his retirement.

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