The compensation received at the time of voluntary retirement or separation is exempt from income tax under section 10(10C) of the Income Tax Act, 1961. However, there are certain conditions that need to be met for the exemption to apply.

The following conditions need to be met for the exemption to apply under Income Tax Act:

• The compensation must be received by an employee.
• The compensation must be received on account of voluntary retirement or voluntary separation.
• The compensation must be received in accordance with a scheme of voluntary retirement or voluntary separation that has been approved by the appropriate authorities.
• The amount of compensation must not exceed the prescribed limits.

The prescribed limits for the amount of compensation that can be exempted are as follows:

• For employees of public sector companies: Rs. 5 lakh
• For employees of other companies: Rs. 2 lakh

If the amount of compensation exceeds the prescribed limits, the excess amount will be taxable.

In addition to the above conditions, the following guidelines also need to be followed for the exemption to apply:

• The scheme of voluntary retirement or voluntary separation must be in accordance with the economic viability of the company.
• The scheme must be approved by the Chief Commissioner or Director General of Income Tax Act.

If the above conditions are met, the compensation received at the time of voluntary retirement or separation will be exempt from Income Tax Act.

CASE LAWS

• In the case of CIT v. Bharat Petroleum Corporation Ltd.(2008), the Supreme Court held that the compensation received by an employee on voluntary retirement is taxable under section 17(ii) of the Income Tax Act, even if it is paid in installments. The Court held that the compensation is in lieu of the salary and allowances that the employee would have earned had he continued in service.
• In the case of CIT v. Indian Airlines Corporation(2011), the Delhi High Court held that the compensation received by an employee on voluntary retirement is taxable under section 17(ii) of the Income Tax Act, even if it is paid as a lump sum. The Court held that the compensation is in lieu of the salary and allowances that the employee would have earned had he continued in service.
• In the case of CIT v. Larsen & Toubro Ltd.(2012), the Bombay High Court held that the compensation received by an employee on voluntary retirement is taxable under section 17(ii) of the Income Tax Act, even if it is paid as a lump sum and is subject to a condition that the employee cannot be re-employed by the company. The Court held that the compensation is in lieu of the salary and allowances that the employee would have earned had he continued in service.

EXAMPLES

• Pension. This is a regular payment made to a person after they retire from employment. It is usually calculated based on the person’s salary and length of service. Pension is exempt from tax in all states of India.
• Gratuity. This is a lump sum payment made to an employee on their retirement or death. It is usually calculated based on the employee’s salary and length of service. Gratuity is exempt from tax in all states of India, except West Bengal.
• Retrenchment compensation. This is a lump sum payment made to an employee who is laid off from their job. It is usually calculated based on the employee’s salary and length of service. Retrenchment compensation is exempt from tax in all states of India.
• Leave encashment. This is the payment of the monetary value of unutilized leave at the time of retirement or separation from service. It is taxable in all states of India, except West Bengal.
• Commuted pension. This is a lump sum payment made to an employee in lieu of a portion of their pension. It is taxable in all states of India, except West Bengal.
• Lump sum payment. This is a one-time payment made to an employee at the time of their retirement or separation from service. It is taxable in all states of India, except West Bengal.

FAQ Questions

• What is the difference between “profit in lieu of salary” and “retirement benefits” under Income Tax Act?

“Profit in lieu of salary” is a lump-sum payment made to an employee in lieu of his or her salary. It is taxable as income from salary. “Retirement benefits” are payments made to an employee on his or her retirement, such as gratuity, pension, and leave encashment. These payments are generally exempt from Income Tax Act.

• What is the difference between “voluntary retirement” and “separation” under Income Tax Act?

“Voluntary retirement” is when an employee retires from his or her job on his or her own terms. “Separation” is when an employee is separated from his or her job by the employer, such as due to redundancy or retrenchment. Compensation received on voluntary retirement is taxable as “profit in lieu of salary”, while compensation received on separation is generally exempt from Income Tax Act.

• What are the documents required to claim exemption under Section 10(10C) of the Income Tax Act?

The following documents are required to claim exemption under Section 10(10C) of the Income Tax Act:

• A certificate from the employer stating that the compensation was received in connection with the voluntary retirement of the employee.
• A copy of the voluntary retirement scheme.
• A copy of the order of voluntary retirement.
• A copy of the receipt for the payment of compensation.