Retrenchment compensation [Section 10(10B)] :

Retrenchment compensation will be exempt from tax subject to the following limits:
(a) Amount calculated in accordance with the provisions of section 25 F of the Industrial Disputes Act, 1947

i.e. 15/26 * Avg salary of last 3 mths Completed yrs of service and part thereof in excess of 6 mths

(b) An amount, not less than ` 5,00,000 as may be notified by the Central Government in this behalf,
whichever is lower.
The retrenchment compensation for this purpose means the compensation paid under Industrial Disputes Act, 1947 or under any Act, Rule, Order or Notification issued under any law. It also includes compensation paid on transfer of employment under section 25F or closing down of an undertaking under section 25FF of the Industrial Disputes Act, 1947.
The above limits will not be applicable to cases where the compensation is paid under any scheme approved by the Central Government for giving special protection to workmen under certain circumstances.

Illustration 9
Mr.  Garg received retrenchment compensation of Rs 10,00,000 after 30 years 4 months of service. At the time of retrenchment, he was drawing basic salary Rs 20,000 p.m.; dearness allowance Rs 5,000 p.m. Compute his taxable retrenchment compensation.

Solution

Retrenchment compensation received	Rs 10,00,000
Less : Exemption under section10(10B) [See Note below]
Taxable retrenchment compensation	Rs 5,67,308

Note : Exemption is to the extent of least of the following :

(i) Compensation actually received	= Rs 10,00,000
(ii) Statutory Limit	= Rs 5,00,000
(iii) Amount calculated in accordance with provisions of the Industrial Disputes Act, 1947 = [ 15/26 * (20,000 3) (5,000 3) / 3 * 30 years ]	= Rs 4,32,692