Indian Income Tax Issues - retrenchmentcompensation

Retrenchment Compensation to workmen

As per section 10(10B), exemption is provided in respect of any retrenchment compensation received by a workman under the provisions of the Industrial Disputes Act, 1947 or under any similar enactment or under any rule, order or notification issued under such enactment or under any standing order, award, contract of service or agreement.

The maximum amount exempt is the lower of the following:

1. Amount calculated under section 25F of the Industrial Disputes Act, 1947.

Note: As per section 25F(b) of the Industrial Disputes Act, 1947, the workman has to be paid at the time of retrenchment, compensation which shall be equivalent to fifteen days average pay for every completed year of continuous service or any part thereof in excess of six months.

Average Pay means the average of the wages payable to the workman as under:

Type of Workman	Average Pay
Monthly paid workman	Average of the wages payable in three complete calendar months preceding the date on which average pay becomes payable.
Weekly paid workman	Average of the wages payable in four complete weeks preceding the date on which average pay becomes payable.
Daily paid workman	Average of the wages payable in twelve full working days preceding the date on which average pay becomes payable.

In case the workman has not worked for the full period as specified in the above table, average pay shall be calculated as the average of wages payable to a workman during the period for which he actually worked.

2. Maximum monetary ceiling specified vide Notification No.10796 dated 16.2.1999 which is Rs.5,00,000.

Other points to be noted:

Excess received: The amount received in excess of the lower of the above two amounts is taxable.

Notice to Employee: As per the Industrial Disputes Act, 1947, the workman has to be given one month’s notice indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of notice.

Closing down of the undertaking: In case of closing down of the undertaking as per Section 25FFF of the Industrial Disputes Act, 1947, every workman who is in continuous service for more than one year in that undertaking immediately before such closure shall be paid retrenchment compensation in accordance with section 25F.

However, if the undertaking is closed down on account of unavoidable circumstances beyond the control of the employer, the compensation to be paid to the workman under Section 25F(b) shall not exceed his average pay for three months.

However, in the following circumstances, the closure of undertaking shall not be deemed to be closed down due to unavoidable circumstances beyond the control of the employer (Section 25FFF(1):

Ø Financial difficulties including financial losses or

Ø Accumulation of indisposed stocks; or

Ø Expiry of period of lease or licence granted to it; or

Ø In case where the undertaking is engaged in mining operations, exhaustion of the minerals in the area in which the operations are carried on.

Note:

Ø As per Section 25FFF(1A), no retrenchment compensation needs to be paid to any workman on the closure of mine by reason of exhaustion of minerals of that area, if the following conditions are fulfilled:

a. Employer provides the workman with alternative employment with effect from the date of closure on the same remuneration as he was entitled to receive, and on the same terms and conditions of service as were applicable to him, immediately before closure.

b. The service of the workman has not been interrupted by such alternative employment.

c. The employer, in terms of such alternative employment or otherwise, is legally liable to pay the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by his alternative employment.

Ø As per Section 25FFF(2), Where any undertaking set-up for the construction of buildings, bridges, roads, canals, dams or other construction work is closed down on account of the completion of the work within two years from the date on which the undertaking had been set-up, no workman employed therein shall be entitled to any compensation under clause (b) of section 25F, but if the construction work is not so completed within two years, he shall be entitled to notice and compensation under that section for every completed year of continuous service or any part thereof in excess of six months.

Disclaimer: All the information provided above is for informative purposes only. You are advised to consult your tax consultant before you act upon any of the above information. In spite of this, if any person acts upon this information and suffers any loss, we are not to be held liable.

Though all efforts have been made to provide latest information, you are advised to check latest circulars, latest changes in law etc from the Indian Income Tax Department.

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