As per section 10(10B), compensation received at the time of retrenchment is exempt from tax to the extent of lower of the following:
(a) An amount calculated in accordance with the provisions of section 25F(b) of the Industrial Dispute Act, 1947; or
(b) Maximum amount specified by the Central Government (Rs. 5,00,000);
(c) Actual amount received.
Under the Industrial Dispute Act, a workman is entitled to retrenchment compensation, equal to 15 days’ average pay for each completed year of continuous service or any part in excess of six months.
Compensation in excess of aforesaid limits is taxable as salary. However, the aforesaid limit is not applicable in cases where compensation is paid under any scheme approved by the Central Government.